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LIFE INSURANCE FUNDAMENTALS 


Harper s Life Insurance Library 


Selling Life Insurance 

John A. Stevenson 

The Psychology of Selling Life Insurance 

E. K. Strong, Jr. 

Meeting Objections 

John A. Stevenson 

The House of Protection 

Griffin M. Lovelace 

Analyzing Life Situations for Insurance Needs 

Griffin M. Lovelace 

Principles of Life Insurance. (In preparation) 

Griffin M. Lovelace 

Functions of Life Insurance. (In preparation) 

Griffin M. Lovelace 

Inheritance Tax. (In preparation) 

Franklin W. Ganse 


Harper & Brothers> Publishers 






LIFE INSURANCE 
FUNDAMENTALS 


BY 

GRIFFIN M. LOVELACE 

DIRECTOR OF THE LIFE INSURANCE TRAINING COURSE AND 
PROFESSOR OF LIFE INSURANCE, SCHOOL OF COMMERCE 
ACCOUNTS AND FINANCE, NEW YORK UNIVERSITY 




HARPER & BROTHERS, PUBLISHERS 

NEW YORK AND LONDON 



LIFE INSURANCE FUNDAMENTALS 


Copyright, 1923 
By Harper & Brothers 
Printed in the U.S.A. 


First Edition 

A-X 


< «. 

' f < 

« o 



JAN 23'23 








©Cl A60800S 






CONTENTS 


PART I 

The Functions of Life Insurance 

CHAP. PAGE 

I. Needs. 3 

II. Applying Life Insurance to Various Needs. 21 

III. How Much Life Insurance Should I Carry?. 41 

IV. Benefits of the Life Insurance Estate. 56 

PART II 

Diagnosis and Prescription 

V. The Prospect’s “Picture”. 75 

VI. The John Browns— A Thriftless Family. 85 

VII. The Paul Millers— A Thrifty Family. 101 

VIII. Peter Dale—An Average Case. 117 

IX. A Young Chemist, Who Has No Dependents. 125 

PART III 

The Principles of Life Insurance 

X. Mortality Table—Net Natural Premium Discounting 

at a Rate of Interest. 137 

XI. The Single-premium Compound Discount—Five-year 

Term Insurance. 151 

XII. Comparing Net Natural and Single Premiums—Five- 

year Term Single-premium Reserves—The Whole- 
life Net Single Premium. 160 

XIII. Net Level Premium. 174 

XIV. Ordinary Life Net Premium and Reserves. 185 
















VI 


CONTENTS 


CHAP. PAGE 

XV. Nonforfeiture Values—Cash and Loan Values—Paid-up 

and Extended Insurance. 203 

XVI. Overhead or Operating Expenses—Loading—Gross Pre¬ 

miums—Preliminary Term and Modified Preliminary 
Term—Select and Ultimate Method. 213 

XVII. Surplus and “Dividends”. 228 

XVIII. Annuities. 239 

XIX. The Contract—Policy and Application. 253 

XX. The Ordinary Life Policy. 263 

XXI. Nonforfeiture Values—Premiums—Disability—Double 

Indemnity—Miscellaneous. 283 

XXII. Dividends. 304 

XXIII. Limited-payment Life, Endowment, and Term Policies.. .. 322 
XXIV. The Life-income Policy. 331 











PREFACE 


This book has been prepared to meet a particular 
demand for a much shorter and less comprehensive 
course than is being given in the life-insurance training 
courses in such institutions as New York University, 
Carnegie Institute of Technology, and the University 
of Denver. 

Since the time actually available for class-room work 
will be very limited, Parts III and IV have been made 
rather complete on certain subjects. The discussions 
are in considerable detail and with some repetition, so 
as to make things as clear as possible for the beginner 
and in order that longer readings may be assigned and 
the time in the classroom economized as much as 
possible. 

In Parts I and II the author has used extracts from 
his books, Analyzing Life Situations for Insurance Needs 
—The Case Method and The House of Protection , both 
published by Harper & Brothers. 

Thanks are cordially given to Dr. John A. Stevenson, 
who assisted in determining the scope of the book, to 
Mr. W. L. Blackadar, who took the time in a busy 
season to read the manuscript of Parts III and IV, to 
Miss L. Bean, who worked out most of the illustrative 
problems in Part III, and to Mr. S. D. Jones, who gave 
permission to reproduce from his book the tables of 
ordinary life net premiums and reserves, as well as the 


Vl| 


Vlll 


PREFACE 


net natural premium tables. The single-premium re¬ 
serve table and dividend illustrations are quoted from 
Flitcraft’s Life Insurance Manual , for which acknowl¬ 
edgment is also due. 

As this book was written for a special purpose and 
was completed in a very limited length of time, it is 
quite possible that the student or the instructor may 
discover an occasional error. If any are found the 
author will greatly appreciate having them brought 
to his attention so that the corrections may be made 
for future editions. 


New York, 
November //, 1922 


G. M. L. 


PART I 


THE FUNCTIONS OF LIFE INSURANCE 

To Satisfy Certain Human Needs 





A 








/ 













r 

































LIFE INSURANCE FUNDAMENTALS 


CHAPTER I 

NEEDS 

I T would be very helpful to life-insurance students 
if we could tabulate the answers from, say, ten 
thousand people, men, women, and children, to this 
question, “What benefits are furnished by life insur¬ 
ance ?” It is probable that the great majority of the 
answers would be general and vague, rather than 
specific. Nearly every one of the ten thousand would 
be sufficiently familiar with life insurance to say, 
“Life insurance pays a woman money after her hus¬ 
band’s death.” There would be some who would say, 
“Life insurance helps a widow to take care of her 
children.” Some would say, “Life insurance paid off 
the mortgage for a family I know.” But answers like 
this last one would probably be comparatively few, 
and they would usually come from persons who had 
received some benefit from life insurance or had known 
cases in which they had observed certain specific 
benefits. 

The writer has suggested to his classes at Carnegie 
Tech and New York University the desirability of 
asking clients what they want their beneficiaries to do 
with their life-insurance money. In most cases, it 
develops that they have not thought of life insurance 

3 


4 LIFE INSURANCE FUNDAMENTALS 

in specific or concrete terms. In only a vague way they 
have thought that their life insurance would make life 
easier for their families. 

The lack of an understanding of what life insurance 
will do specifically , in the many different situations 
that arise following the death of the head of a family, 
results first of all in an underestimation of its value 
and its importance to the family; secondly, in failure 
to determine the amount of life insurance really needed; 
thirdly, in a lack of interest on the part of the average 
client. Even if he were told what life insurance w T ould 
accomplish in various situations for families in general, 
he would be far less interested than he would be if 
some one could show him exactly what life insurance 
would do for his case. 

A certain widow answered from her own experience 
the question, “What will life insurance do?” She said: 
“Til tell you what it has done for me. When my hus¬ 
band died, he left $10,000 of life insurance. It took ' 
about $1,500 of the money to pay all our bills, in¬ 
cluding those on account of his illness. We had a 
suburban home on which there was a mortgage of 
$3,000; this I paid off, and had $5,500 left, which I 
invested in a good first mortgage at 6 per cent. That 
gave me $330 a year, or $27.50 a month, which about 
paid the taxes and upkeep of the home and left about 
$200 to help on the grocery bill. With our debts all 
paid, our home to live in, and $200 to help pay for 
food, my problem was greatly simplified, and I have 
really not had an especially hard time earning the rest 
of the money needed for our other expenses.” 

She was then asked, “If you had known before your 


NEEDS 


5 

husband's death what you know now, do you think he 
would have carried more life insurance?'’ 

“Yes,” she replied. “When his life insurance 
premiums came due each year, they seemed pretty big, 
and I sometimes said so. He would say, 'Yes, but, if 
anything happened to me, that #10,000 would come in 
handy, and it makes me feel more comfortable to 
carry it.’ That was just about the way I felt about 
life insurance, that it would 'come in handy.’ I had 
never figured out what would be the least amount of 
money it would take to live, although it would have 
been easy to do so; and, of course, I didn’t expect my 
husband would die so soon. If I had known what I 
know now, I think our life insurance might have been 
twice as large. It would have meant some sacrifice for all 
of us, to carry so much; but we could have managed.” 

STUDYING CASES 

It will be helpful to the beginner to study numerous 
cases in which the head of the family has died. In 
some there will be an opportunity to see needs which 
stand out clearly because they have not been satisfied; 
in other cases, where there was life insurance, obser¬ 
vation of what the life-insurance money has been, or 
is being, spent for will bring out clearly how life in¬ 
surance can help beneficiaries. 

A very good exercise for students of life insurance is 
to write accounts of cases they know, beginning with 
those in which hardships, sacrifices, ill health, dis¬ 
appointments, and unhappiness have resulted from 
failure of the deceased to provide life insurance for his 
dependents. If all the students in a class will con- 


6 LIFE INSURANCE FUNDAMENTALS 

tribute such accounts, the collection will be most valu¬ 
able; for, as a rule, it will reveal many different kinds of 
needs which were not provided for, but which might 
have been adequately, or partially, satisfied by the 
use of life insurance. 

Following are a few cases selected from a number 
handed in by a class in the Life Insurance Training 
Course at New York University, in response to a regular 
assignment of daily work: 

Case submitted by Student A: 

In 1900, on East 68th Street, New York, there lived a family of 
four, blessed with wealth, health, and happiness. The father, a 
stock broker, gratified all the desires of his family. He was par¬ 
ticularly indulgent toward his daughter, granting her every wish. 

The mother was proud and fond of social life; the son was a prom¬ 
ising young architect. 

Suddenly, without warning, came the panic qf 1907. This father 
was among those who went under on the street. Only a few paying 
stocks remained. The strain was too much for him and within a 
year he died. 

The son supported the mother and sister as well as he could— 
a young man starting life with a promising career, but handicapped 
with the burden left by an indulgent, but short-sighted, father. 

A little over a year passed, when the boy became ill—there were 
doctors’ bills and expenses for many months—then he died. Very 
little money remained; the untrained daughter and the helpless 
mother were left to face the necessity of earning their own living. 

To-day the daughter is a middle-aged woman living with her old 
deaf mother in a small uptown apartment. She does knitting and 
sewing for her wealthy friends, and her mother sits and reads the 
stock-market reports, searching for dividends to be declared on 
worthless stocks. 

Despite all their prosperity, it is now clear that this 
family faced unrealized future needs which should 


NEEDS 7 

have been provided for. Of course, if this father had 
been able to foresee that, without adequate life insurance, 
his wife and daughter would eventually be living a 
wretched existence, he would probably have done 
something about it. Had he known that the boy 
would be burdened, while he was trying to get a start 
in life, to such an extent that he would be seriously 
handicapped in his work and become so fatigued that 
he could not resist disease, no doubt something would 
have been done. 

How much money would pay the living expenses of 
the widow and daughter to-day? How much, as we 
see the situation now, would have made them inde¬ 
pendent of the young son? Did any life insurance rep¬ 
resentative ever sit down with this father and figure it 
all out in advance? Possibly, yes; probably, no. 

Student B submitted the case of his own family. 
He was deeply affected as he related it to the class, 
especially as he told how the children had been sep¬ 
arated and deprived of the advantages enjoyed by a 
united family. Here is his paper as he turned it in 
after class: 

Robert-, a young man of thirty-one, father of six children, 

ranging in ages from seven years to six months, died after a brief 
illness of nine days, leaving his family destitute. The only insur¬ 
ance carried was a small fraternal assessment policy, which, due to 
the inability of the insured to pay a quarterly assessment personally, 
owing to illness, was declared lapsed and void. 

The widow was forced to break up her home, placing four of the 
elder children in two orphan asylums. The youngest two children 
were retained by the widow, having been refused admission to the 
orphanages because they were too young. After four years of 
poverty and hardships the widow died, leaving the six children 



8 LIFE INSURANCE FUNDAMENTALS 

doubly bereaved. The children, now grown, all married but one, 
have never resided together under one roof, having been separated 
since childhood; and, due to that separation, they have never felt 
that bond of affection natural and inherent in families raised 
together. 

The undersigned was the eldest of that unfortunate family of 
children. , 


Suppose this mother had been in a position to buy 
a little home or to pay a modest rental for an apartment 
in a wholesome district. Suppose she had had even 
$30 a month to buy nourishing, though extremely 
simple, food for her children, enough money for warm, 
though unfashionable, clothing for herself and her 
boys and girls. Even if there had been no more, they 
would have made ends meet. The children could have 
stayed with their mother and the mother and the 
children could have earned the rest of the money needed 
without undue hardship. This mother would not 
have had the sorrow of being separated from her little 
ones. They would have known the joy of a home with 
mother and brothers and sisters, and would have 
benefited by its influence. 

Maybe this father could not have afforded enough 
life insurance to provide an income of #80 to #100 
indefinitely; but if his family could have had #80 to 
#100 a month for ten years, even for five years, wouldn’t 
that have been a godsend? I wonder if anyone ever 
sat down with this father, helped him to foresee actual 
needs that would exist, if he should die prematurely, 
and to figure out how he might provide for them. 
Maybe it was done, but most likely nobody ever offered 
this service in a concrete way. No doubt life insurance 



NEEDS 


9 

was frequently presented in general terms, but not as 
means of supplying specific needs, carefully listed and 
discussed one by one. 

Student C wrote: 

I happen to know very intimately a family whose situation could 
have been very much improved had the breadwinner carried suf¬ 
ficient life insurance. Some years ago the man in question was a 
successful doctor, having a splendid practice, and showing indica¬ 
tions of being in a position to give his growing family all the advan¬ 
tages of a comfortable home, a good education, and social position. 
He was a hard worker, and at last the strain began to tell; finally, 
he died quite suddenly. His relatives and friends were greatly 
surprised to learn that he had left but little of this world’s goods 
behind him. The result was that the mother was compelled to 
give up their comfortable home in the East Fifties and take a very 
small apartment in the Bronx. The oldest boy was taken out of 
school and put to work. The second son was an invalid, and, 
although the family had hopes that, with good medical and surgical 
care, he could be cured, this had to be given up and he has never 
been well since, or able to do anything toward the support of his 
mother. The daughter, whose ambition had been to go to Smith 
College, had to forsake the prospect and help her mother in the 
apartment. In other words, the family had a complete reversal 
in their mode of living, their prospects for the future, and their 
welfare. 

Suppose that some experienced life underwriter had 
sat down with this physician some years before his 
death—even when his children were quite young, and 
had said to him, “ Doctor, to-day you are in the prime 
of life and enjoying unusual success. You have given 
your family an unusually comfortable home. You are 
educating your children. Everything points toward 
a happy future for all of you. You may live to be an 
old man, retired after an honorable and profitable 


IO LIFE INSURANCE FUNDAMENTALS 

career, with your boy and your little girl grown up, 
graduated from first-rank colleges, say, Harvard and 
Smith. I hope all these dreams of the future will 
come true. But, as a physician, you know even better 
than I do that no man can tell whether he will live to 
do the things he hopes to do. Suppose you should 
die prematurely—and you might, might you not? 
Is your present estate large enough and secure enough 
so that your wife would have, without question, say, 
$400, or even $250, a month every month, as long as 
she lives, or at least until your boy and girl are grown 
up ? If something happened to your boy, is there a per¬ 
manent income to take his place? Is it certain that 
your daughter will go to college? Let’s see how much 
you ought to guarantee for monthly living expenses 
and for an educational fund for the children.” If the 
underwriter and the doctor could have pictured vividly 
to themselves the possibility of things happening as 
they did happen, and had estimated just how much 
money the family would require for various expenses 
perhaps the doctor might have applied for an adequate 
life insurance. 

The following was submitted by Student D: 

Mr. Thomas, a friend of the family’s, was the president of a large 
piano factory. Last winter he died and left an estate which af¬ 
forded his married children, all over 40, and his widow, aged 65, 
ample cash funds and an interest in the business. 

The business immediately “slumped,” following his death; the 
beneficiaries put their liquid cash in it, but it was too late and the 
amount was not large enough. 

The result was that the business recently failed for #800,000 and 
the beneficiaries lost all that had been left to them. 


NEEDS n 

Here was a business which, like so many others, 
depended, for its success, to a very great extent, on 
the personality and ability of its head. Just how 
the “slump” developed is not explained. It may 
be that the immediate demands for cash were in 
excess of what the business could raise. Perhaps 
there were large customers who did business with the 
firm only because of the man who was its head; with 
him gone, they were easily persuaded to make other 
connections. Or, credit on which the business had 
depended in the past was withdrawn. Whatever the 
cause, it is clear that money was needed to stabilize 
this piano business. 

This case was reported by Student E: 

Mr. Russell died suddenly, leaving his wife and a son and daughter 
of high-school age. He had been known as probably the richest 
man in his town in the Middle West, had a large and beautiful 
home, and his family were very prominent socially in the community. 
He was prominent in civic work, and had a large and profitable 
business. 

About six months prior to his death he failed in business through 
no fault of his own; and, hesitating to lower their standard of living 
to any noticeable extent, the family managed to keep their social 
position while Mr. Russell strived to stage a business come-back. 

When matters came to a show-down at his premature death, it 
was found that outstanding bills and personal debts were so large 
that the home was sold at auction to satisfy the creditors. With 
the £10,000 insurance estate which was paid direct to her, Mrs. 
Russell moved to Chicago and set up a millinery establishment. 
Although she never before had had any business experience, she is 
managing somehow to make a modest living. The children, after 
being out of school two years, finally finished high school, but could 
not finance themselves through college, as their father would have 
done, had he lived. 


i2 LIFE INSURANCE FUNDAMENTALS 

There have been thousands of similar cases—rich 
men, prominent in private and public enterprises, 
who have come to feel that their positions are impreg¬ 
nable. Everything they have desired in life seems 
to have been realized. They are respected for their 
success; their families, through their wealth, have 
attained social position; the future happiness of their 
children seems assured, for they will be well educated, 
enjoy every opportunity for travel and culture, have the 
money with which to buy whatever they want and to 
maintain positions of influence in the community. 

In the midst of prosperity and financial and social 
strength it is hard for such men to think of the pos¬ 
sibility of failure. It seems as if the foundation which 
has been built must endure forever; that one's fortune, 
or at least the successful business, must suffice to make 
certain a happy and comfortable future for one’s family. 

Yet misfortune, no respecter of precedent or rank, 
overtakes thousands of successful business men before 
they die, or overwhelms their business after their death, 
so that much, if not all, of the luxury and comforts 
to which their families had been accustomed is taken 
from them; sometimes so little is left that they must 
work even for the necessities of life. 

It would have been easy for these men to prevent 
such disasters. With their large incomes, the pre¬ 
miums on large amounts of insurance would not have 
been very burdensome. The reason why most of them 
have not carried large insurances has been simply that 
they could see no necessity for doing so. Most of them 
never considered specifically what losses there might 
be or what needs their families might have for money. 


NEEDS 


13 

Even granting, for the sake of argument, that a man’s 
fortune may not fail after his death, there are demands 
for cash which may impair it: inheritance taxes in the 
various states in which his investments are located, the 
federal estate tax on net estates of over $50,000, accrued 
federal income tax, state, county, and municipal taxes, 
loans, large mortgages on investment property, and 
many other smaller items which, however, make an 
important total. It is very, very rare that the rich 
man’s cash and liquid assets are sufficient to cover all 
such items. Loans must be obtained by the estate, 
or property must be converted into money. It may 
be impossible to borrow enough money. The urgent 
necessity of selling good assets, no matter what may be 
the condition of the market, usually results in serious 
losses. 

SPECIFIC NEEDS 

If some one had sat down with these men and showed 
them item by item the needs that would require cash from 
some source immediately—or practically so—after their 
deaths—it is probable that many of them would have 
adopted life insurance as the most reasonable and con¬ 
venient means of providing the money. 

It would probably have been possible to hold their 
interest in specific needs , by asking them to estimate 
minimum amounts that would be required by their 
wives each month to pay living expenses, and annual 
amounts to pay such bills as taxes on the home; and, 
perhaps, some of them, admitting the possibility of 
failure in their estates after their deaths, might have 
decided that it would be wise to guarantee provision 


i 4 LIFE INSURANCE FUNDAMENTALS 

for their families on a minimum basis, for the satis¬ 
faction it would give themselves and as protection 
against possible misfortune. 

If we analyze the foregoing cases submitted by the New 
York University students, and other similar cases, we find 
many different kinds of needs that were left unprovided 
for. There were needs of food, clothing, and shelter for 
mothers and children. In order to secure these, the 
mother was, in most cases, obliged to take up any sort of 
work she could get. As a rule, she was not trained for 
any special vocation and could not, therefore, earn very 
much. Usually she was forced to do work of an un¬ 
congenial and fatiguing nature. If she was forty years 
old or more, she found it hard to secure any position. 
Sometimes the children had to abandon their education. 
In some cases they had to begin when they were very 
young to aid in the support of the family, sometimes 
to the injury of their health. There were also instances 
in which the mother was unable both to work and to 
care for the children, so that they had to be turned 
over to some one else; and in some cases it was neces¬ 
sary to separate the children and parcel some, or all, 
of them out to relatives because the mother was unable 
to support them all. Sometimes the mother’s health 
became impaired, so that she was not able to work 
regularly. Boys and girls, whose fathers and mothers 
had been ambitious to have them go to college and 
receive a good foundation for business and social life, 
have been deprived of the opportunities which they 
would have had if their fathers had lived. Homes 
which had become dear to the mothers and children 
were sacrificed and the proceeds used for living expenses. 


NEEDS 15 

Sometimes a family, accustomed to their father’s 
success and large income, used to living on a large scale 
and believing that he possessed considerable estate, 
have been surprised to find that his obligations reduced 
the estate to small proportions—notes at the bank, 
mortgages on the home or on investment property, 
large accumulations of bills. What a disappointment 
when property which must be sold is appraised at much 
less than it was thought to be worth, or when a quick 
sale must be made at a sacrifice price, in order to realize 
necessary funds! 

Then there are cases in which a business is inherited 
by the family, a business from which the father had 
long derived the income which made possible a beau¬ 
tiful home, many comforts and even luxuries; everyone 
thinks how fortunate it is that the family has this busi¬ 
ness, and assumes that it will continue to support 
the widow and children in great comfort. But it de¬ 
velops that affairs are not so well managed as they 
were before the father’s death, or that credit is not so 
easily obtained; and the business fails, frequently 
carrying with it other funds contributed, in vain, for 
the purpose of saving the sinking ship. 

In all these situations, and many others, we see needs 
unprovided for, needs which, however, might have 
been satisfied by the prudent use of life insurance: 
needs of health, needs of safety, needs of comfort, 
needs of happiness, needs of preparation for life, of 
meeting obligations and responsibilities, needs of the 
widows, needs of children, needs of business, needs of 
old men and women, needs of creditors, needs of debtors, 
needs of many, many kinds resulting in each case from 


16 LIFE INSURANCE FUNDAMENTALS 

the termination of a life in the continuance of which 
some one, frequently many persons, had a financial 
interest. 

THE MONEY VALUE OF LIFE 

A valuable life nearly always ends in the midst of 
uncompleted things. Most active men who have many 
responsibilities leave some financial confusion behind 
them. There is nearly always some complication, 
something started that wasn't finished, something 
planned that wasn't yet undertaken, things hoped for 
that would have been done, if somebody could just 
have lived a little longer. Nearly always it takes money 
to untangle the complications, nearly always there is 
some sacrifice in settling the estate, potential values 
are lost, because property cannot be held but must be 
sold to provide cash, or because there is not sufficient 
money to pay carrying charges. 

These calamities result from the loss of the potential 
earning power of the breadwinner. If he had lived, his 
earnings would have paid the family's living expenses; 
his income would have provided not only necessities, 
but also certain comforts, recreation, and vacations. 
With his earnings to pay all the expenses at home, 
the boys and girls ’would without question have been 
permitted to go through high school; possibly they 
would have been given the privilege of a college educa¬ 
tion; and he might have assisted them in their prepara¬ 
tion for professional work or in special training for some 
chosen vocation. 

Looking ahead and picturing all the various benefits 
which he would naturally provide for his wife and chil- 


NEEDS 


i7 

dren out of his income—the result of his earning power — 
it is perfectly clear that it is the destruction of that earn¬ 
ing power which will deprive them of what they are 
entitled to and what he wants them to have. 

It is possible to estimate the money value of earning 
power—the money value of a productive life. An un¬ 
scientific, yet very practical, rule-of-thumb method may 
be illustrated as follows: A man who earns $6,000 a 
year as salary also owns a building inherited from his 
father and yielding in rentals an income of $6,000 a 
year net. Assuming money to be worth 6 per cent, 
if we were considering the purchase of this building, 
we should probably estimate its value to be about 
$100,000. 

What is the money value of the man's life? His 
salary is $6,000. It seems logical, therefore, assuming 
money to be worth 6 per cent to appraise the value of 
his earning power at $100,000. If the building burned 
uninsured, the loss would be an income of $6,000 a 
year. If he died, uninsured, the same amount of loss 
would be sustained by his family. His personal value 
is, therefore, by this method of reasoning, seen to be 
the same as that of the building. 

Another method, more scientific, but more compli¬ 
cated and not so easily made clear to the average person, 
is as follows: From mortality tables we can calculate 
the average future lifetime of a group of persons living 
at a certain age; this average is called the expectation 
of life. For example, according to the American Ex¬ 
perience Table of Mortality, shown on page 140 there 
are 81,822 persons living at age 35 out of 100,000 who 
originally composed the group at age 10. A certain 



18 LIFE INSURANCE FUNDAMENTALS 

number of these 81,822 is expected to live, say, one 
year; some, two years; others, ten, twenty, fifty years, 
etc. The average future lifetime expected for this 
group of 81,822 at age 35 is 31.78, say, 32 years. For 
the 81,090 living at age 36, the expectation of life is 
31.07, say 31; and so on, the average decreasing with 
increasing ages. 

Suppose that the man whose income is $6,000 a year 
is 35 years old. The only prediction we can make as 
to how long he will live is that the average future 
lifetime or expectation of life for the group at his age 
is 32. Of course, he might live only one year, or he 
might live sixty years. But the average for the group 
at his age is 32. It is, therefore, reasonable to estimate 
the value of his earning power on the basis of the ex¬ 
pectation of life at his age. 

What is the value at present of the future salary of 
$6,000 a year for the expectation of life at his age? 
The total amount of salary would be 32 X $6,000, or 
$192,000; but $192,000 would not be the value at present 
of $6,000 a year over a period of 32 years. The present 
value would be that sum of money which with compound 
interest at an assumed rate of interest would pay 
$6,000 each year for the 32 years, no money being left 
at the end of the period. 

In the interest tables in your life-insurance rate books 
you will find the present value of $1 due at the end of 
each year for a series of years at various rates of interest. 
Let us select 4 per cent interest. The present value, 
at 4 per cent compound interest, of $1 paid at the end 
of each year for 32 years is $17,874; i.e., if we deposited 
$17,874 in a savings bank at 4 per cent compound 


NEEDS 19 

interest, this sum plus the compound interest earned 
from year to year would enable us to draw out $1 
at the end of each year for 32 years (at the end of 
which period our bank account would be entirely 
exhausted). 

The present value of a salary of $6,000 a year for 32 
years at 4 per cent compound interest is 6,000 X 
$17,874, or $107,244; which is a fair estimate of the 
value of the man’s earning power, the money value 
of his life. At any rate, it is the money value of the 
average life at his age, on a basis of $6,000 a year and 
4 per cent interest. 

Of course, the higher the age, the smaller is the 
expectation of life, and, therefore, the less the present 
value of future earning power. At age 40 the ex¬ 
pectation of life is 28 years. The present value of $1 
due at the end of each year for 28 years at 4 per cent 
compound interest is $16,663, and the present value at 
age 40 of a salary of $6,000 a year for the expectation 
of life is 6,000 X $16,663, or $99,978.00, practically 
$100,000. After age 40, the present value, or earning 
power is constantly growing less because the expectation 
of life is being gradually shortened (even if we should 
assume that there would be no decrease in vitality and 
in annual income). So that above age 40 the $100,000 
arrived at by the first method would be an over¬ 
estimated valuation for an income of $6,000 a year; 
below age 40 it is conservative, becoming constantly 
more conservative, the younger the age of the person 
whose earning power we are appraising. Yet for 
practical purposes the first method is not open to criti¬ 
cism, because it rarely, if ever happens that a man 


20 LIFE INSURANCE FUNDAMENTALS 

is able to insure up to the value of his life estimated 
by either method. 

If we were trying to value a man’s life or earning 
power as a basis for fixing the amount of life insurance 
he should carry, it would be necessary to deduct from 
his year’s income that part of it spent for himself. 
If his earnings were #6,000 a year and he spent #2,000 
on himself, leaving #4,000 for his family, the insurable 
basis at age 35 would be #17.87 X 4,000, or #71,496, 
or, by the rule-of-thumb method, #66,666.66, assuming 
that money will earn 6 per cent annually. 

Most men are not able to carry enough life insurance 
to replace their families’ share in their annual incomes, 
as illustrated above. The chief value of making an 
estimate or appraisal of the money value of a man’s 
life and of his financial value to his family is in order 
that he may have a more vivid impression than he has 
ever had before of how much capital it would require, 
at interest, to replace the compensation which he 
receives in exchange for his labor or services; that he 
may see what a large fund would be necessary if his 
family were to receive after his death, in interest, as 
much money every month as he now spends for their 
comfort, exclusive of what he spends on himself. 

The most effective, and the most practical, way of 
answering the question, how much life insurance should 
an individual carry, is to determine what are the needs 
for which money will probably be required after a 
client’s death. This subject’ will be discussed fully in 
another chapter. 


CHAPTER II 

APPLYING LIFE INSURANCE TO VARIOUS NEEDS 


O NCE we understand the definite needs to be 
found in certain types of situations, the next step 
is to classify them and to determine how the various 
needs may be provided for by means of a life insurance 
plan or program, how much money will be required, 
when it will be needed, and how it should be paid. It 
is the duty of every underwriter to study carefully 
every new case or problem that arises in his practice, 
classify the needs, determine how much money will be 
required, when it will be needed, and how it should 
be paid. 

A very good method is to take the events following 
death, in the average case, chronologically, and set 
down the needs for which money will be required. 

PERSONAL INSURANCE FOR FINAL EXPENSES 

The first group of expenses will be on the deceased’s 
own account. Not one man in a million goes out of 
the world with his obligations all paid. Such a man, 
on his deathbed, would probably have to proceed 
somewhat as follows: He would order all of his credi¬ 
tors’ accounts to be brought in and audited, and he would 
sign the checks to pay them or give his power of attorney 
to some one else to do so. These accounts would in¬ 
clude not only bills, but obligations of any sort; then he 

21 


22 LIFE INSURANCE FUNDAMENTALS 

would call in the doctors and say: “How much will 
your bills be? Y m still alive, and may live another 
day or so; you can add whatever is necessary for one 
or two more days. ” Then the nurses would be paid 
and the hospital bill. Finally he would have some one 
arrange in advance with the undertaker and pay the 
bill, buy a lot in the cemetery, order and pay for a 
monument. If possible he would write a check to pay 
off the mortgage on his home. We assume that he would 
make every possible effort to quit the world square 
with everybody. 

Despite his efforts, there would be some bills he 
couldn’t pay before he breathed his last. For instance, 
practically all the states in which he owned property 
would collect on each bequest or inheritance under his 
estate an inheritance tax. The federal government 
would collect a tax on his entire estate, if it was in 
excess of #50,000. And, of course, there would be no 
way of determining these taxes until after his estate 
had been settled. Appraisals would have to be made 
of all properties. His accrued income tax to the time 
of his death would also be payable. 

Even if a man should have the presence of mind, 
the strength, and the cash with which to effect, just 
before his death, a settlement of every possible claim 
for which a statement could be rendered immediately, 
there would still be certain things for which cash would 
be required after his death. 

As a matter of fact, when the average man dies, 
there are always many things that must be done and 
bills to be paid which will require cash. It is rare, 
even in large estates, that there is enough cash in bank 


APPLYING TO VARIOUS NEEDS 23 

to square the deceased with the world. Sometimes 
thousands, even hundreds of thousands, of dollars, 
must be borrowed by an estate or secured by selling 
property. 

The best way to provide for these things is for a man 
(or a woman) to carry life insurance payable to him¬ 
self—that is, to his estate, his executors, administra¬ 
tors, or assigns, or payable to his wife, to make his last 
payments for him. 

Following is a list of the principal items for which 
cash may be required to settle bills and obligations 
after death. Of course, all these items would not be 
found in the average case; some would be found in one 
case, some in another; certain ones are always present. 

FINAL EXPENSES 

A. His personal obligations: 

1. Mortgage on his home. 

2. Mortgages on investment property. 

3. Notes to banks and other lenders. 

4. Income tax for previous year, if unpaid. 

5. Accrued income tax for current year. 

6. State, county, and municipal taxes due, or accrued, but unpaid. 

7. Accumulated bills of all kinds on his own and his family’s 

account. 

8 . Subscriptions already made to church, charities, and other 

philanthropic institutions, but not yet paid. 

B. Expenses on account of final illness and death: 

1. Physician’s bill; consultations, etc. 

2. Surgeon’s fee. 

3. Salaries to nurses. 

4. Drug bills. 

5. Hospital bills, including room and board, analyses, tests, etc. 

6. Funeral expenses. 


24 LIFE INSURANCE FUNDAMENTALS 

7. Cemetery lot and monument. 

8. State inheritance taxes. 

9. Federal estate tax. 

10. Administration expenses. 

11. All other expenses due to death; mourning clothes, telegrams 

and telephone calls, etc., etc. 

C. Emergency fund: 

In planning his personal insurance (exclusive of insurance for his 
family) which will provide cash to square him with all creditors and 
pay his own final expenses, it is practically impossible for the in¬ 
dividual to think of everything. Something unforeseen is certain 
to arise and more money will be required than was anticipated. 
The man who is anxious to have his personal accounts all paid 
promptly, have his estate settled without liquidation of any of his 
assets, and to avoid shrinkage in his assets in a forced sale to secure 
money, will provide an emergency fund for things that can’t be 
anticipated. For this purpose there should be additional life in¬ 
surance payable in cash. 

How important it is for the insured to provide special 
insurance for his own account , as suggested above, is 
emphasized by the fact that many men who carry 
moderate amounts of life insurance for their families, 
leave so many bills to be paid and obligations of various 
sorts to be liquidated, that there is little , if any y of the 
insurance money left for their families. 

Life insurance should be planned carefully with speci¬ 
fic amounts in mind for definite purposes, and one of 
the first provisions to be made is for cash to pay the 
final expenses, bills, and obligations of the deceased 
himself. 

It is a duty of the life underwriter to help his clients 
plan their insurance in such a way that the things they 
want done will he accomplished. Such a program cannot 


APPLYING TO VARIOUS NEEDS 25 

be carried out with certainty unless provision is made 
for paying off all obligations incurred by the insured 
before his death and all expenses on account of his death. 

For example, a man might leave $20,000 of insurance 
to his wife with the purpose of providing for her an in¬ 
come, at 5 per cent, of $1,000 a year. But if there were 
a mortgage of $5,000 on the home and other items of 
$4,000, to be paid after his death, the total of $9,000 
would reduce the family's income to 5 per cent on 
$11,000, or $550 a year. 

As a matter of fact, just that sort of thing happens 
in the average case— a man thinks he is leaving a reason¬ 
able amount of insurance to pay his family's living 
expenses. But when all his own obligations have been 
liquidated , and the expenses of his illness and death have 
been paid , his insurance is practically exhausted. 

Of course, if insurance is payable direct to a named 
beneficiary, in most states the insured’s creditors 
could not forqe the beneficiary to give up her insurance 
money; but most widows and children would do so 
anyhow. They would rather make a sacrifice and pay 
the accumulated bills or indebtedness than to keep 
the money and have it said that the husband or father 
had died owing money that had never been paid. 

A most important point in this connection is that 
men who expect that their estates of real and personal 
property will furnish a living to their families over¬ 
look the fact that if they don’t provide some insur¬ 
ance for their own account, payable in cash, certain 
portions of their estates must be sold or hypothe¬ 
cated, but, usually, sold, to secure the necessary funds. 
For example, a man says: “I have a home all paid for. 


26 LIFE INSURANCE FUNDAMENTALS 

I have $30,000 in bonds and preferred stocks. In¬ 
surance men have tried to tell me these bonds or stocks 
may fail. But there’s nothing doing; they can’t sell 
me any life insurance, and you can’t, either. You 
might answer: “Mr. Robinson, every man must decide 
such matters for himself, of course. You don’t want me 
to decide anything for you, and I’m not going to be 
so presumptuous as to try to do so. But I believe 
you are open-minded to suggestions from men who 
have had a wide experience in their own fields. From 
my own long observation in the settlement of estates, 
I find that, in the average case, similar to yours, there 
is one question of insurance that has been overlooked 
by most clients and by many insurance men. Take 
a case I know personally. The head of the family 
left a fair-sized estate and expected that it would 
provide an income to pay his family’s living expenses. 
After his death there were outstanding bills, accumu¬ 
lated during his illness, amounting to about $1,500. 
He was ill four months following a serious operation. 
The bills for doctors, surgeons, nurses, and hospital 
charges totaled about $3,000. His funeral expenses 
were about $1,000. That made a total of about $5,500. 
He died in February. When March 15th came round, 
his income tax of $800 had to be paid. There were 
state inheritance taxes and a small estate tax to the 
federal government. Also a lot of other things. The 
total amount of cash in his bank account was only 
about $1,000. His widow had to mortgage the home 
and sell some securities to pay all these things. 

“Now, here is where the mistake was made. That 
man thought only of paying his family’s bills. He 


APPLYING TO VARIOUS NEEDS 27 

forgot his own. As a result the family had to pay his, 
and that took a large part of what he had left for them. 
That man needed some life insurance for himself. I 
don't blame you for not having thought of this in your 
own case. But I would blame myself if I didn't tell 
you about it. How much do you think it would take 
as a maximum figure—not the minimum, but the 
maximum—to pay off all your bills and obligations, 
if you died to-night?" 

THE family's NEEDS 

After the final expenses of the deceased husband, 
or father, have been paid, the financial responsibilities 
of the wife or mother begin. For what needs will she 
have to provide and how much money will be required 
for them. Whatever insurance is planned and secured 
for the family's benefit should be based on a considera¬ 
tion of the family's specific needs. 

The Home. The first thing to be thought of is the 
home. If there is a home all paid for, and if it is not 
a more expensive place than the family can maintain 
on their reduced income, then the first need is taken 
care of except in one particular. There will still he a 
certain amount of rent to pay in the form of annual taxes , 
fire insurance , and cost of upkeep , or maintenance. 
The family's budget for living expenses should include 
these items. 

There may be a house on which there is a mortgage. 
In this case, if it is desired that the family continue to 
live in the same home, there is a need of liquidating 
the mortgage and there should be a cash payment of 
insurance to the wife for this purpose; or this sum might 



28 LIFE INSURANCE FUNDAMENTALS 

be paid to a trustee if there was any danger that the 
money might not be used to clear the home. If the 
present home will cost too much to maintain after the 
client’s death, perhaps there should be enough money 
provided to pay interest on the mortgage, taxes, 
insurance, and repairs for a year or two, to avoid 
foreclosure while an effort is being made to sell the 
place advantageously. 

If the client does not own his home, then the family’s 
need of a place to live should be provided for by in¬ 
cluding, for rent, a certain amount per month in the 
family’s budget of living expenses. 

Or, the client who is now renting may think it wise 
for his family to own a little home; in this case they will 
need funds in cash, which may be provided by a special 
life-insurance policy. 

Other Monthly Needs. From month to month the 
mother will be obliged to pay bills for groceries, clothing, 
fuel, light, ice, milk, telephone, car fares, and many 
other miscellaneous items. Then, there must be some 
recreation and social opportunities for herself and the 
children. There must be books, magazines, and news¬ 
papers. They should contribute something to charity. 
All these things make necessary an income payable 
every month as the bills come due or as the expenses 
or obligations are incurred. Taxes, fire insurance, etc., 
must not be forgotten; the money for these must be 
accumulated out of the monthly income, unless a special 
insurance is carried to provide an extra annual payment 
of a few hundred dollars for taxes, etc. 

A monthly income will be paid by the life-insurance 
company in lieu of a cash sum, either for the bene- 


APPLYING TO VARIOUS NEEDS 29 

ficiary’s lifetime or for a limited period. Of course, 
if it is feasible, an ample income should be paid to the 
wife as long as she lives. Many men would wish to 
do the same thing for their daughters. But most men 
must make a compromise between their desires and 
their purses. 

A very good compromise plan is to pay minimum 
income to the wife for life, enough to pay her board or 
to enable her to maintain a little home for herself after 
the children are grown up and married. Then an 
additional income may be paid to her until the children 
are at least through high school. For example, if a 
man is married and has a child five and one ten years 
old, he might provide $50 a month for his wife as long 
as she lives and $50 a month until the younger child 
is through high school; also an additional income of 
$25 a month till the elder child has finished high school. 
Since the man might die during the first year of his 
insurance, we should arrange this income plan as follows: 
(1) $50 a month payable for twenty years certain and 
for life. (2) $50 a month payable for fifteen years; 
and (3) $25 a month for ten years. The widow would, 
therefore, receive #50 + #50 + $25, or $125 a month, 
until the end of ten years following her husband’s death, 
when the elder child would be 20 years old; then $125 — 
$25, or $100 a month, for the next five years— i.e. y until 
the end of fifteen years from the date of her husband’s 
death; and finally $50 a month, after the second child 
is 20 years old, just as long as the wife lives. If she 
died between the end of the fifteenth year and the end 
of the twentieth year from the date of her husband’s 
death, the children would receive the #50 a month to 


30 LIFE INSURANCE FUNDAMENTALS 

the end of the twenty-year period only. If she lived 
longer, she would get the #50 a month until her death, 
but at her death there would be nothing payable to 
the children. 

The above type of monthly-income plan is designed to 
afford the man of moderate means a method by which 
he may provide for the care of the children till they are 
grown, give them a high-school education and an op¬ 
portunity for a fair start in life. 

Almost any combination of income payments may 
be made, and there are different plans, which cannot 
be considered here. These are taken up in detail under 
“optional settlements” in the section of this book 
pertaining to policy contracts. 

If there is a physical or mental invalid among the chil¬ 
dren, a special life income should be provided for the in¬ 
valid, if possible, even if it is only enough to pay board 
every month as long as the child lives. 

Special Education of Children. The mother’s income 
should, if possible, be planned so as to enable her to 
support the children until they have finished high school, 
as in the example above. Many parents are desirous 
that their children shall have special training or educa¬ 
tion after they have finished high school. It may be 
an academic or engineering course in college, or a voca¬ 
tional course, or special training in some art or trade. 
Sometimes, also, the boy or girl expects to study some 
such profession as law or medicine. 

The educational needs of the children are, after 
food, shelter and clothing have been secured, the most 
important of all. A good education equips boys and 
girls to attain a high place in life professionally and 


APPLYING TO VARIOUS NEEDS 31 

socially and to be even better citizens than they would 
otherwise be. Of all the things parents would like to 
do for their children, none is more important in reality 
or in their own estimation than knowledge and training 
as an equipment for life. Here is a need that may not 
be satisfied if the father dies prematurely, unless life- 
insurance policies have been secured for this specific 
purpose. 

Perhaps the following type of plan is as good as any 
for the average educational provision: Write a special 
policy naming the boy or girl as beneficiary. Provide 
that, if the father dies before the son or daughter is 
through college, the funds shall be paid on an income 
basis beginning on a specified day of the month at age 
18, or 19, if the father has previously died, or such later 
year as the father may die; for the child might be 20 
years old and a sophomore in college at the time of 
the father’s death. The income might be arranged 
as follows: #100 a month for four years (or five, six, 
seven, or eight years). This would provide throughout 
the year for board and room, clothing, vacations, and 
incidental expenses. In addition, it might be well to 
provide for payment of $200 to #400 a )^ear, according 
to the college or school selected, payable semiannually 
in August or September and February, to meet the 
special bills of tuition, books, and fees in various organ¬ 
izations, as well as traveling expenses to college, etc. 

It is wise, if possible, to extend the income for a year 
or two beyond the end of the college course, so as to 
give the children a chance to find a right place to start, 
or to take some additional vocational or professional 
training. Occasionally, a father might want to provide 


32 LIFE INSURANCE FUNDAMENTALS 

a sum of several hundred dollars payable at the close 
of the college course, to pay for a general tour of the 
United States or a trip to Europe, as a broadening 
educational opportunity. 

In the above consideration of the educational policy, 
we have thought only of providing educational funds 
in case the father dies. Life insurance may also help 
him to accumulate funds with which to pay for a 
child’s education in case the father lives. For example, 
a father has a son or a daughter three years old. 
He wants to have in hand #4,000 when the child is 
18 years old, so as to pay its college expenses. A fifteen- 
year endowment for #4,000 would pay #4,000 to the 
father or to the child, as might be arranged, when the 
child reached age 18. The father would have made 
easy annual, semiannual, or quarterly deposits for 
fifteen years. Moreover, if the father died at any time 
during the fifteen years, #4,000 would be paid to the 
child, beginning at age 18 (or 19), according to what¬ 
ever method had been selected. 

Some companies write special educational policies 
maturing at a specified age of the child, such as 18. 

The Family s Emergency Fund . In planning a pro¬ 
gram of insurance for the family, it is an excellent idea 
to leave the wife, in addition to the income, a certain 
sum in cash for emergencies, say #1,000 or #2,000, 
in connection with smaller incomes, and greater sums 
with larger incomes. At times there will be an urgent 
need for considerable amounts which could be saved 
out of the monthly income only with difficulty, such as 
for payment of bills for a long illness, a surgical opera¬ 
tion, or a death in the family. 


33 


APPLYING TO VARIOUS NEEDS 

A Readjustment Fund or Income. It will take some 
time—several months, or maybe a year—for the be¬ 
reaved family to adjust itself to new conditions. Per¬ 
haps the deceased father was paying #150 a month 
for rent and the widow can't afford to pay over $50. 
It may take her a little while to make the change. 
She may be ill. It may be necessary to go away for 
a few weeks on account of her health. It is almost 
impossible for her to reduce her scale of living to the 
new, lower basis immediately. A readjustment fund 
would help, an additional $ 1,000 or more; or an increase 
of income for one year; perhaps $1,000, or more, paid 
in monthly installments for one year in addition to 
the permanent monthly income. 

THE NEEDS OF OLD AGE 

Recently the writer attended a meeting at a public 
place maintained particularly for young men. It was 
comfortable and warm indoors, while outside it was 
cold and raining. It seemed strange to see in the 
gathering a large number of old men, who had picked 
out the comfortable chairs in the corners. Most of 
them dozed during the meeting. They looked like men 
who had lived respectable lives, but had come up to old 
age without much of this world's goods, forced no 
doubt to occupy unimportant and unprofitable posi¬ 
tions. There are many such men in old men's homes 
or spending their days and nights sitting somewhere 
in the homes of their children, or their brothers or 
sisters, or nephews or nieces. 

When they had the strength to earn and the oppor¬ 
tunity to save, they failed to lay aside money for the 



34 LIFE INSURANCE FUNDAMENTALS 

rainy day that usually comes to everybody sooner 
or later, and for the shadowy days of old age which 
come to every man and woman whose life is spared. 
Next to providing for the present and future needs 
of our families, our most important economic duty is to 
provide for the needs of our own old age. An old man 
should have at least enough to pay board for himself 
and his wife, who may also live to an advanced age. 
Even if old people are obliged to live with their children 
or relatives, they should by all means have enough in¬ 
come to pay for their share in the household expenses. 
Of course, there are men and women who have never 
been able to earn even enough to live comfortably 
from day to day; but we speak here of that host of men 
and women who can save something if they will. 

Old age may even be a happy time of life, if we can 
have reasonable comforts, a little home, plenty of simple 
wholesome food, warm clothes, and money for a few 
incidentals (old people don’t have as many wants as 
younger persons). 

All men and women hope they may be able to retire 
and “take things easy” when they are old. There 
are things they would like so much to do, which they 
have never had the time to do. Yet most of these men 
aren’t doing anything definite towards building a founda¬ 
tion for a comfortable old age. 

The needs of old age should always be considered 
in making any life-insurance plans. Not only do all 
life policies and long-term endowment policies provide 
for beneficiaries in case of the insured’s death, but they 
also provide substantial accumulations of money in 
later years. If the time comes when the insurance is 


APPLYING TO VARIOUS NEEDS 35 

of less importance than the need of funds to retire on, 
the cash values of life and endowment policies or the 
matured funds at the end of endowment policies at, 
say, age 65 or 70, will make all the difference in the 
world in the lives of the aged policyholder and his 
wife. 

In arranging any program of insurance, therefore, to 
provide for cash at the insured’s death, or an income 
either for the beneficiary’s lifetime or for a limited 
term of years, or an educational fund or income, or 
to pay off a mortgage or notes or, indeed, for any other 
purpose, or for any combination of these items, the 
cash benefits available at age 60, 65, or 70, should be 
noted and made clear to the client. Thus, all his 
insurance, except term insurance, may relieve his 
mind of worry as to his own future needs if he lives 
to old age. 

BUSINESS NEEDS 

There are nearly always certain financial troubles 
in business after the death of the owner, or a partner, 
or an important corporation official, for which cash is 
the only remedy. Such needs as the lack of credit, 
inability to pay bills, notes, or other obligations, may 
make it difficult or impossible to continue the business 
profitably or at all. 

In a small business there is always some one whose 
ability and business character are really the foundation 
upon which the success of the business has been built 
up, and this is also very often the case in a large corpora¬ 
tion. Credit is extended freely because bankers and 
manufacturers or dealers in raw materials have con- 


36 LIFE INSURANCE FUNDAMENTALS 

fidence in some one person. Their experience with 
him has been favorable. He keeps his obligations; 
and his ability has been such that the financial state¬ 
ment of the business has always been satisfactory. 

But he has died. He owned the business himself 
and his family have inherited it. Claims for payment 
of outstanding bills for stocks of goods or raw materials 
are received, notes at the bank are presented for pay¬ 
ment. The wife expects to continue the business, 
so as to make a living for the family. She and her 
husband always agreed that the business could be con¬ 
tinued and made to yield a good profit after his death. 

The amount of cash in bank is small compared with 
total amount of claims. An effort is made to borrow 
money, but no one can be found who has confidence in 
the widow’s ability, to loan the necessary amount of 
cash. Finally, there is only one thing to do—sell the 
business. Purchasers are sought, but nobody wants it 
at the price set—a price fixed on the basis of a going 
business. The best offer is only, say, 50 per cent of 
the price set; yet, it must be accepted. The family 
loses not only control of the business, but one-half of 
the estimated money value of it. In many cases, the 
loss would be still greater. 

One of two partners dies. Problems similar to the 
above will arise. The survivor may be the stronger 
man of the two, in which case the problems will not be 
so difficult if he and the deceased’s heirs are to enter 
into a partnership to continue the business, or if their 
interest is promptly sold to the survivor or to some other 
person acceptable to him as a partner. But there 
are other problems that may be serious. The death 


APPLYING TO VARIOUS NEEDS 37 

of one partner automatically dissolves the partnership 
and the deceased’s business interest is a part of his 
estate. Perhaps it must be sold to satisfy personal 
creditors, or, if not, the family may want to sell imme¬ 
diately so as to withdraw their money. The surviving 
partner would like to buy. Finally they agree on 
a price, too high to suit him and too low to suit the 
heirs; but they compromise. The family wants cash, 
or at least a large portion of the purchase price in 
cash; it is for this consideration that they compromise 
on the price. The surviving partner seeks a loan; 
but cannot find the money. Perhaps, at last, the family 
agree to a plan of partial payments at a higher price. 
Whatever the result is, both the surviving partner and 
the heirs are in very difficult situations. 

Think how different everything would have been if 
there had been an agreement between the two partners 
providing that, at the death of either of them, the de¬ 
ceased’s interest should be aquired by the survivor in 
return for payment to the heirs of a stipulated purchase 
price, the money to be furnished through a life-insurance 
policy carried by the firm on each partner. In this 
case the survivor would have owned the entire business 
promptly without having to borrow any money or 
assyme any obligations; the heirs of the deceased part¬ 
ner would have received in cash, without delay or 
trouble, the amount of the purchase price, previously 
agreed to by the husband or father as a fair one. 

In the case of a corporation, the death of an important 
official may result in the withdrawal or restriction of 
credit. The death of the financial expert would be a 
serious handicap. If the inventor died, commodities 


38 LIFE INSURANCE FUNDAMENTALS 

or processes which he was developing might never be 
finished, resulting in a loss of future profits. Or the 
sales manager may die, and the firm may lose its sales 
organization. The possibility of such losses through 
the death of an important official constitutes a need 
for which life insurance is the simplest and surest 
remedy. 

There are also business needs during the lifetime of 
business owners, partners, and officials, for which life 
insurance may be very helpful. As J. P. Morgan, Sr., 
once said, in testifying before a committee of the Con¬ 
gress at Washington, the chief factor in the basis of 
credit is character. It is only when there is good 
business character on which to base credit that money 
will be loaned on relatively small collateral or without 
any collateral— i.e., simply on notes. The personal 
notes of some people are worth ioo cents on the dollar; 
the signatures of others have no value. 

Often a bank feels that it would be satisfactory to 
lend to a certain individual except for the possibility 
of his dying before refunding the loan. Here is a need 
which can, of course, be satisfied through life insurance. 
If the borrower lives, he will pay the money. If he 
dies before the loan is liquidated, it will be paid by a 
policy of life insurance. 

The cash values of life-insurance policies, constantly 
growing from year to year, also give the policies col¬ 
lateral value. Loans may be obtained from the com¬ 
panies or, sometimes, from banks on the sole security 
of the policies. The collateral value of life-insurance 
policies is of especial importance in a tight money mar¬ 
ket. When money is hard to secure at banks, as in 


APPLYING TO VARIOUS NEEDS 39 

1907, many business concerns borrow on the insurance 
policies carried on the lives of members, or officials, 
of the firm. Not only are they able to borrow on their 
policies when it is almost, if not quite, impossible to 
secure money elsewhere, but they get it at not exceeding 

6 per cent, as guaranteed in the policies, despite the 
fact that other lenders, in those states where 6 per cent 
is not the legal maximum rate of interest, are charging 

7 per cent or 8 per cent or more. 

The knowledge that life-insurance policies are carried 
by the responsible heads of a business inspires confidence 
in the minds of all persons who are called upon in any 
way to grant loans, credits for goods purchased, or 
extensions of time. It gives them a very comfortable 
feeling to know that, even if the responsible head dies, 
they will get their money. 

Another need often arises in the liquidation of a 
business, viz., to prevent the shrinkage of assets in a 
forced sale. When it is decided to close out a busi¬ 
ness either during the lifetime of the chief owner, 
partner, or official or after his death, assets are nearly 
always sold at a loss, even when the firm is not pressed 
by creditors; the only exception to this rule would be 
when the business is very successful and is being dis¬ 
posed of for purely personal reasons. But if the credi¬ 
tors are pressing for payment of loans or goods or mort¬ 
gages, there is almost sure to be some loss due to the 
urgent necessity of raising money. Two of the most 
important reasons, therefore, for carrying business life 
insurance are, first to provide cash, from the proceeds 
of a policy, at the death of the insured, to offset shrink¬ 
age arising from the forced sale of the business, and, 


4 o LIFE INSURANCE FUNDAMENTALS 

secondly, to build up, through the cash values, a sinking 
fund, which would offset shrinkage in values in case of 
liquidation during the insured’s lifetime. 

When we speak of business life insurance, we do not 
necessarily refer to special policies, but rather to the 
use of all life-insurance policies for business purposes. 
Nevertheless, some companies do issue special forms of 
life, endowment, and term policies for the use of cor¬ 
porations, which differ in only certain details as to the 
beneficiary, the ownership of cash values, the receipt 
of dividends, etc., which changes are ordinarily ac¬ 
complished by assignment of the insurance by the in¬ 
sured person to the corporation. 

In reference to the use of cash values to build up 
sinking funds, this purpose is often accomplished by 
the use of endowment policies maturing at a desired 
date. One interesting use of the endowment to provide 
a sinking fund is illustrated by the following case: 
Three men formed a corporation and arranged for an 
issue of ten-year bonds. They took out ten-year 
endowment insurance for one-third of the amount of 
the loan on each of the three, with the idea that if any 
one of them died the money would at once be available 
to retire one-third of the bonds. If all three died 
during the ten years, the entire loan would be paid. 
If they lived to the end of the ten-year period, the 
endowment would mature at the same time as the loan 
for the amount of the loan and all the bonds could be 
redeemed on the due date at par. Such a plan nat¬ 
urally strengthens the market for such bonds. 


CHAPTER III 

HOW MUCH LIFE INSURANCE SHOULD I CARRY? 

This chapter is reprinted from the author’s book, The House of Pro¬ 
tection, which was written for the purpose of convincing both clients and 
agents that income plans should be used when the purpose of life insurance 
is to provide for living expenses. (Published by Harper & Brothers in 
Harper’s Life Insurance Library.) 

P ERHAPS there is no problem in securing life 
insurance concerning which the average man is 
more uncertain than that which is presented by the 
apparently simple question, “How much life insurance 
should I carry?” 

What is the basis of his decision that he will insure 
for $5,000 or $10,000 or $50,000? Sometimes he 
simply estimates roughly that he can carry a certain 
amount of insurance without too great a sacrifice 
of other things. He may select $5,000 just because it 
is a round figure. Perhaps the underwriter has sub¬ 
mitted a plan for $10,000 and the whole interview has 
centered about this amount, with the result that when 
the client takes favorable action he adopts the entire 
plan submitted, including the amount, or he decides 
to take just one half of what the agent proposed. 

It is true, also, that many life underwriters use no 
scientific method of determining the amount of insur¬ 
ance their clients need. There must, however, be a 
correct way of arriving at the proper amount of life 
insurance for a given situation. 


41 


42 LIFE INSURANCE FUNDAMENTALS 

THE LIFE-INSURANCE YARDSTICK. 

When you decide to purchase any commodity, you 
wish to be sure that you get just the quantity you need— 
no more and no less. If you are buying the material 
with which to make your child a dress or a coat, you 
know just how much you will need; for you have 
taken certain measurements, and the cloth is measured 
accordingly. 

Why shouldn’t the same method be used in securing 
life insurance? If you desire insurance to provide 
living expenses for your wife and children, of course 
you wish to secure enough to pay for their rent, gro¬ 
ceries, meat, milk, clothing, coal, electric light and 
gas, doctor’s and dentist’s bills, as well as bills for books, 
telephone, recreation, and other essentials. If you can 
afford it, you will carry enough life insurance to pay 
the monthly bills for all these things. 

How are you going to judge the amount of life in¬ 
surance required for these necessities? Obviously, by 
estimating the cost of actual living expenses. The bills 
for most of the above items will be more or less regular, 
month in and month out. The family’s bills will come 
in at the end of each month, just as they now come to 
you. If you were living on the income from an estate 
of $100,000, and not on your earnings, would you 
estimate your annual buying power by thinking, 
“I can spend so much, since I have $100,000?” By 
no means. You v/ould say, “ I have an income of $6,000 
a year. I am going to save $1,500. Therefore, I have 
$4,500 to spend. ” F ou zvould measure your annual 
buying power by your income . 


HOW MUCH SHOULD I CARRY? 43 

How easy it is to obscure the permanent buying power 
of capital by speaking of the capital itself instead of 
the income. Each $1,000 of principal, yielding 6 per 
cent interest, produces $5 a month. The permanent 
buying power of $1,000 at 6 per cent is only $5 a month. 
Yet the average person attaches more value to a sum 
of $1,000 than to $5 a month, although, in terms of 
permanent buying power, they are one and the same 
thing (at 6 per cent). 

The buying needs of the family should be measured in 
terms of income and not in terms of capital. Most men 
say, “I have $10,000, or $30,000, or $100,000 of in¬ 
surance protection for my family.” But that remark 
isn’t any more intelligible than would be the statement, 
“I have bought $5 or $10 worth of cloth to make my 
child a coat.” 

You would always measure the cloth in yards, for 
in no other way could you tell whether you were get¬ 
ting enough or not; and we can understand how much 
protection we have for our families only if we measure 
the protection by monthly income. If you say, “I 
have $100 a month of income insurance for my family,” 
you, or anyone else, will understand at once that you 
have arranged to pay bills amounting to $100 for your 
family every month. 

The monthly income is the yardstick of life-insurance 
protection. Capital does not measure the family’s 
ability to pay their bills; but the monthly income does. 

I HAVE $10,000 OF LIFE INSURANCE 

Suppose a client tells a life underwriter that he has 
all the insurance he needs—say, $10,000. It is the 


44 LIFE INSURANCE FUNDAMENTALS 

agents duty to get out his yardstick and measure his 
client’s insurance protection so that he will understand 
clearly what provision he has made. "1 he agent should 
not criticize his client because he carries only #10,000 
of insurance, for the client is using a false measure and 
may not realize just what the #10,000 will do. But 
suppose the agent should say, “ Mr. Doe, you have made 
a good beginning on your insurance program; #10,000 
at 6 per cent will yield #600 a year, or #50 a month. 
That will pay the rent. Let us call that policy your 
family’s Tent policy.’ You will w r ant to provide for 
the groceries, too, of course; that means at least another 
#50 a month, another #10,000 of insurance. Perhaps, 
an additional #50 a month (#10,000 of insurance) will 
furnish clothing and other personal necessities; and it 
will probably require #50 a month more to pay for heat 
and light, doctor’s and dentist’s bills, elementary 
education, vacation, recreation and many other ex¬ 
penses.” In this way the buyer would see his present 
insurance in its true proportions, and would also 
quickly understand how much insurance he should have. 

Everything we purchase has its proper standard of 
measure. We measure butter by the pound, coal by 
the ton, railroad transportation by miles or kilometers, 
gasoline by the gallon. Our insurance, or our insurance 
needs, should always he measured by the insurance yard¬ 
stick, the monthly income, or, still better, by the estimated 
amount of monthly bills for specific items of expense. 

USING THE BUDGET TO MEASURE PROTECTION 

Measuring life-insurance needs by the estimated 
amount of the monthly bills may be called the budget 


HOW MUCH SHOULD I CARRY? 45 

method. It consists in determining the amount of 
money the family will require for each of the various 
items of living expense. Every man and woman should 
adopt the budget system in fixing his or her own living 
expenses and in determining what he or she can save 
regularly out of his earnings. The budget is commonly 
used in business. The use of the budget in fixing one’s per - 
sonal expenses and margin of sowings is simply putting 
personal finances on a business basis. 

In undertaking a new business one of the first and 
most important things to do is to estimate expenses. 
This is done by itemizing the materials or stock that will 
have to be bought, the labor that will be required, and 
the overhead, and setting down the cost of each item. 
With such an estimate or budget before you, it is not 
difficult to determine the amount of money necessary 
to start the business and the monthly amount that will 
be needed for overhead charges, etc. 

The same method of determining the minimum in¬ 
come needs of one’s family will make it easy to fix the 
amount of insurance to give the family life-insurance 
protection. It is easy for a husband or father to make 
a list of the actual items of expense which his family 
will be obliged to meet, if they are to live in reasonable 
comfort. 

To use an old illustration, suppose you were going 
away on a long business trip for six months or a year, 
say to South America or around the world, and that 
your family were going to stay at home. What pro¬ 
vision would you make for their living expenses during 
your absence? You would probably first make a list 
of your average monthly bills or total up your last year’s 


46 LIFE INSURANCE FUNDAMENTALS 

expenses. Then, if one of the children expected to 
enter college or any other special expense had to be met 
during your absence, you would add this to the amount 
estimated for regular living expenses. You would 
deposit in the bank enough to cover the family’s es¬ 
timated expenses while you were away, or you would 
arrange to have a certain sum, based on the budget, 
deposited to your wife’s account every month. 

The same method is the only one by which we can 
find the correct answer to the question, “How much 
life insurance do I need for the protection of my family ?” 

PROVISION FOR PAYING BILLS AS THEY FALL DUE 

Life-insurance protection is provision for the family's 
reasonable expenses in such a way that the correct amount 
of money is payable to the family at the time that this 
money is needed for specific expenses. 

When a man dies, for example, there is usually a 
large amount of money to be paid out at once. He 
has, as a rule, been seriously ill for a considerable time. 
Regular monthly bills may have accumulated for two 
or three months, especially if his credit has been good. 
His funeral expenses amount to a large sum; for the 
family rarely spares any cost, often spending much more 
than they can afford. 

Then there is the cost of administering the estate. 
The federal and state inheritance taxes require cash, 
and very few estates contain enough cash in bank for 
such purposes. There are only two ways in which one 
may be sure that all these obligations can be liquidated 
without selling valuable property at the prevailing 


HOW MUCH SHOULD I CARRY? 47 

market price , good or bad — viz.: (i) to carry constantly 
an excessive cash balance in the bank, which the good 
business man won’t do and the average man can’t 
do; and (2) to provide an ample cash payment of life 
insurance, available immediately at death, without any 
complication, difficulty, or sacrifices of property value. 

Insurance of $500 to $100,000, or more, depending 
on the requirements of the individual case, should be 
payable in cash to meet the obligations due imme¬ 
diately after death. 

These first bills which the widow must pay are really 
her husband’s last bills. A month later she receives 
her first bills—the first bills of her own administration. 
There should be funds due at that time to pay these 
bills. At the end of the second month she will have a 
second batch of bills; and she should have another in¬ 
come payment with which to pay them. Every month, 
as long as she lives, there will be bills to pay; and every 
month, if possible, as long as she lives, the widow should 
have an income check, punctual, regular, guaranteed. 

Later the time will come, perhaps, when one of the 
children is to enter college (or a business or professional 
school). For the next several years the family’s ex¬ 
penses will be increased. A special income should 
begin when the son or daughter enters college, and con¬ 
tinue for the four years, or longer in case of professional 
education. After two or three years, a second son or 
daughter might be ready for college. Again there 
should be an increase in income for four or five years 
to cover the further increase in expenses. 

Isn’t it clear that the husband or father who seeks 
an answer to the question, “How much life insurance 


48 LIFE INSURANCE FUNDAMENTALS 

do I need?” will find a quick and correct answer by 
making up a budget which will fairly represent the 
minimum expenses his family will have to meet if 
they are to enjoy reasonable comfort and if the children 
are to be properly educated? 

UNITED STATES TREASURY HOME BUDGETS 

It will be helpful to examine specimen family budgets. 
Below are several budgets reproduced from an article 
by Benjamin R. Andrews, of Columbia University, 
which appeared in the “Thrift” number of the Annals 
of the American Academy of Political and Social Science 
(January, 1920). Mr. Andrews says: “The following 
standard budgets were recently prepared under the 
general direction of the present writer for the Savings 
Division of the United States Treasury Department. 
The chief credit for them is due to Mrs. Alice O. Norton, 
editor of the Journal of Home Economics , who was 
ably assisted by Miss S. Maria Elliott, of Simmons 
College. Acknowledgment should also be given for 
the advice and suggestions of many of the foremost 
home economists in the United States.” 

A number of persons to whom the author has shown 
these budgets have said they doubted if the items of 
rent were large enough. It must be noted, however, 
that these budgets have been prepared on a thrift basis. 
It is probably true that most families would not be 
satisfied with the allotments made for rent; but it is 
also true that most American families are not economizing 
as they should. In order to save substantial amounts 
it is necessary to make sacrifices. 


HOW MUCH SHOULD I CARRY? 49 


No. i—#1,200 a Year—#100 a Month 



Number in 

the Family 

Two 

Three 

Four 

Five 

Savings. 

#10 

*7 

#5 

#3 

Rent. 

16 

16 

16 

16 

Food. 

27 

34 

4 i 

48 


Clothing. 

13 

14 

IS 

IS 

Housekeeping expenses. 

10 

9 

8 

7 

Churches, charities. 

6 

5 

3 

1 

Health, recreation, education. 

10 

8 

6 

S 

Personal, miscellaneous. 

8 

7 

6 

5 

Total for month. 

#100 

#100 

#100 

#100 


No. 2—#1,800 a Year—#150 a Month 

Number in the Family 



Two 

Three 

Four 

Five 

Savings. 

#27 

#21 

*iS 

#10 

Rent . 

20 

20 

22 

22 

Food. 

37 

44 

51 

58 

Clothing. 

•J # 

20 

20 

21 

22 

Housekeeping expenses. 

II 

12 

12 

12 

Churches, charities. 

10 

9 

8 

7 

Health, recreation, education. 

12 

12 

10 

10 

Personal, miscellaneous. 

13 

12 

11 

9 

Total for month. 

#150 

#150 

#150 

#150 


No. 3—#2,400 a Year—#200 a Month 

Number in the Family 



Two 

Three 

Four 

Five 

Savings. 

$48 

#40 

*31 

#21 

Taxes (federal income). 

2 

I 

— 

— 

Rpnt . 

25 

25 

27 

27 

Food . 

40 

48 

56 

64 

Clothing. 

22 

25 

28 

30 

Housekeeping expenses. 

18 

20 

20 

20 

Churches, charities. 

IS 

12 

11 

II 

Health, recreation, education. 

14 

14 

13 

13 

Personal, miscellaneous. 

16 

IS 

14 

14 

Total for month. 

#200 

#200 

#200 

#200 
















































































So LIFE INSURANCE FUNDAMENTALS 

No. 4—$3,000 a Year—$250 a Month 


Number in the Family 



Two 

Three 

Four 

Five 

Savings . 

$ 65 

#53 

#40 

$30 

Taxes (federal income). 

5 

4 

3 

2 

Rent... 

30 

30 

35 

35 

Food. 

4.0 

48 

•J J 

56 

64 

Clothing. 

T 

30 

T 

33 

36 

39 

Housekeeping expenses. 

25 

30 

32 

32 

Churches, charities. 

19 

17 

16 

16 

Health, recreation, education. 

18 

18 

16 

16 

Personal, miscellaneous. 

18 

17 

16 

16 

Total for month. 

$250 

$250 

$250 

$250 


No. 5—$5,000 a Year—$416.66 a Month 

Number in the Family 



Two 

Three 

Four 

Five 

Savings. 

$125.66 

$105.66 

$90.66 

$76.66 

Taxes (federal income). 

15.00 

14.00 

13.00 

12.00 

Rent. 

50.00 

50.00 

60.00 

60.00 

Food. 

45.00 

S5-oo 

65.00 

75 -oo 

Clothing. 

45.00 

50.00 

55 -oo 

60.00 

Housekeeping expenses. 

50.00 

60.00 

63.00 

65.00 

Churches, charities. 

36.00 

33.00 

27.00 

25.00 

Health, recreation, education. 

25.00 

25.00 

22.00 

22.00 

Personal, miscellaneous. 

25.00 

24.00 

21.00 

21.00 

Total for month. 

$416.66 

$416.66 

$416.66 

$416.66 


HOW TO USE SPECIMEN BUDGETS 

These budgets may be helpful in two ways: 

(1) If you are considering insurance and think it 
may be difficult to finance the premium deposits, the 
budgets may assist you in apportioning your expenses 
so that you can save enough to adopt a substantial 






















































HOW MUCH SHOULD I CARRY? 51 

life-insurance program. A profitable evening may be 
spent in analyzing the budget which is nearest to your 
own income and comparing these items for various 
expenditures with what you are now spending. If 
your income exceeds $5,000, budget No. 5 will serve as 
a general pattern by which you may make up a budget 
of your own. 

(2) If you are trying to decide the amount of a life- 
insurance income for your family, it will help you 
greatly to study these budgets. Begin with Budget No. 
1 and see if you think that there are any unnecessary 
items listed, or that the amounts are too large. If 
you believe that your family could not live comfortably 
on Budget No. 1, consider the others until you work 
out a budget which you think would provide reasonably 
for your family. Disregard the savings item, for you 
will hardly plan to have them save anything out of the 
insurance income. But you will probably wish to 
increase the allowance for rent. For example, under 
Budget No. 1, if we omit the savings item and increase 
the rent to $25, the total of the budgets will be $99, 
$102, $104, and $106, respectively, for families of two, 
three, four, or five persons. 

Budget No. 1 may be considered the minimum in¬ 
come required by families who desire to live in whole¬ 
some surroundings in the cities. A slightly smaller 
minimum might possibly suffice in places where rents 
and food are lower. 

THE SMALLER INSURANCE INCOME 

These budgets also help us to see clearly the value 
of small insurance incomes. For example, a father 


52 LIFE INSURANCE FUNDAMENTALS 

desires to guarantee to his family an income of $100 
a month, but his means won’t permit. He can, how¬ 
ever, provide #50 a month. 

If we increase the rent to $25 (Budget No. 1), we see 
that the total for rent and food (three persons) is $59 
a month. The #50-a-month insurance income will 
almost pay for the groceries and rent, according to 
this budget. If the father must face the fact that his 
wife and children will be obliged to earn something, 
what a satisfaction it will be to know that, at any rate, 
it will be necessary for them to earn only $50 a month 
instead of $100 a month; or, to put it another way, 
that instead of being forced to live on whatever they 
can earn—perhaps $50, $60, or $75 a month— they will 
have $100 a month , even if they can earn only $50. 

The same idea holds good for smaller incomes. An 
insurance income of #20 or $25 a month will provide 
the minimum for rent. If this is all the husband or 
father can do for his family, it is well worth doing. 
Rent is the first fundamental need to be provided. 
With the rent guaranteed, the mother’s problem of 
keeping her children together and making a home for 
them will be greatly simplified by the monthly-rent 
policy. The amount to be earned by herself and the 
children will thus be materially reduced. 

SHORT-TERM INCOMES 

Sometimes a man finds that even by making heroic 
efforts to make his life-insurance savings as large as 
possible, he cannot secure enough to provide a suffi¬ 
cient life income for his wife, say, #200 a month. His 
children are ten and twelve years old. He finds he 


HOW MUCH SHOULD I CARRY? 53 

can provide a life income of $100 a month for his wife 
and an additional income of $100 a month for ten years 
for the support of the children. Even if he dies im¬ 
mediately, his wife will have an income of $200 a month 
until the children are twenty and twenty-two years 
old, and, thereafter, a life income of $100 a month. 
Likewise, a total income of $100 a month could be pro¬ 
vided to run until his children were grown, with #50 
or $60 a month continued permanently for his wife. 
An almost endless variety of income-insurance com¬ 
binations makes it possible for the underwriter to effect 
a practical adjustment between the client's needs and 
his ability to save for his insurance premiums. 

No matter whether you are earning $2,000 or $50,000 
a year, you will find it most helpful to make up a min¬ 
imum budget for your family’s insurance needs. It 
will give you a different idea of your insurance require¬ 
ments from any you have ever had before. And if 
you find you can’t provide the amount of insurance 
income your family will need, the budget will help 
you to see just what the amount which you can afford 
will accomplish. 


Determining the Practical Program. In working out 
a practical program adapted to the needs of a particular 
client, there are five general steps to be taken : 

First, the various needs which may arise after the 
death of the client should be listed, regardless of his 
financial ability. 

Secondly, the most important or urgent of these 
should be selected. If there is any doubt in the under- 



54 LIFE INSURANCE FUNDAMENTALS 

writer’s mind, he should say something like this, “Mr. 
Dale, which of these needs do you consider the most 
important?” “Which would you racher your family 
would have, this or that?” “If you can only invest 
‘so much’ in insurance, which of these needs do you 
feel ought to be provided for first?” 

Thirdly, the amount of money required for each need 
selected as urgent should be determined. The agent 
may suggest. The prospect must decide. Questions 
may be asked of the client, such as, “How much 
money do you think will it take to pay final expenses ? ” 
“How much money every month would it take, as 
a minimum, to pay your family’s living expenses?” 
“Won’t it be a good idea to list the monthly bills for 
various items, such as rent, etc.? Here is a piece of 
paper. Let us make up a little budget.” “How 
much money will it take to pay your daughter’s way 
through college?” “What is the amount of your 
mortgage?” “How much money would you like to 
have your boy get when he is thirty years old?” 
“How much money would you like to leave to your 
church?” “How much money would you like to 
receive in cash when you are 65 years old?” 

Fourthly, we must find out how much money the 
client can invest in his life-insurance plan or program. 
(We use plan in connection with provision for a single 
need, such as the mortgage on the home. A program 
provides for more than one need, as, for example, for 
cash to pay final expenses and an income payable to 
the wife for life, no matter whether separate policies 
are used for different needs or not. 

Fifthly, with the most important needs in mind, the 


HOW MUCH SHOULD I CARRY? 55 

client s idea of the amounts of money required for them, 
and information regarding the amount of premiums he 
can invest, the underwriter can determine the practical 
program , which is frequently a compromise between what 
the insured ought to do , or would like to do, and what he 
can, or is willing to do. 


CHAPTER IV 

BENEFITS OF THE LIFE INSURANCE ESTATE 

T HE limited scope of this book makes it impossible 
to discuss the uses of life insurance fully. The 
principal needs have been pointed out and discussed 
sufficiently to give the student the modern point of 
view, viz., that needs form the basis of professional 
salesmanship, and to show that life insurance should 
be planned with the purpose of adapting it to specific 
needs. 

The topical outlines given below cannot be discussed, 
or developed, here, but they will serve to suggest to the 
student numerous ways in which he may extend the 
service of life insurance to his clients and furnish also 
certain topics which can be used as a basis for interviews. 

THE LIFE-INSURANCE ESTATE 

I. General advantages of the life-insurance estate. It 
is superior to the average estate of real and personal 
property in the following respects: 

A. It is worth ioo cents on the dollar, when payable, 
no matter what the conditions of the real-estate 
and securities markets may be. Unlike real and 
personal property, it will be guaranteed worth 
its full value. A piece of real estate purchased 
only a few years ago may have depreciated in 

56 


BENEFITS OF LIFE INSURANCE ESTATE 57 

value owing to changing conditions in surround¬ 
ings, etc., and good securities may have depre¬ 
ciated; but a life insurance policy purchased 
even fifty or sixty years ago is still good for its 
original face value whenever it matures. 

B. Such portion of it as is necessary to settle up the 

estate is available promptly and without any 
loss, such as might be suffered by a forced sale 
of securities or real property to provide cash. 

C. Only the excess above $40,000 of life insurance is 

subject to the federal estate tax, conditioned on 
its being paid to a beneficiary; and, if no other 
estate exists, $90,000 will be exempted, due, of 
course, to the $50,000 estate exemption. 

D. There is no cost for the administration of the life- 

insurance estate. 

E. The life-insurance estate when paid to a named 

beneficiary is not probated, and court costs are 
not incurred. 

F. Publicity of the family’s life-insurance inheritance 

is avoided. 

G. The life-insurance estate is settled immediately, 

and there are no delays such as attend the 
settling of any other estate. 

H. The beneficiary is relieved of all the annoying 

details incident to the settling of other estates. 

''2. What the life insurance estate does for the man and 
his family. 


58 LIFE INSURANCE FUNDAMENTALS 
A. Family. 

I. The insurance provides an immediate estate, 
which, upon the death of the insured, indent - 
nifies the family (in part) for 

(a) the loss of the earnings of the insured. 

(b) depreciation in the assets of his estate. 

(c) that portion of the estate taken to defray 
the costs of settlement of the estate, in¬ 
cluding taxes. 

(d) loss of the insured’s life interest in an 
estate. 

II. The husband and father may thus provide 
for his family, after his death, the food, 
shelter, clothing, medical attention, education, 
comforts, recreation, and other necessities 
which he would have given them if he had 
lived and without which they cannot live the 
comfortable, happy, healthy, and wholesome 
lives he always intended they should have. 

III. For the wife: 

(a) To pay outstanding bills. 

(b) To settle estate quickly. 

(c) To support her for life. 

(d) Or, if a life income is not feasible, to 
furnish living expenses for a limited period 
during which she may readjust her plans 
and prepare for the future. 

(e) To enable her to learn some occupation 
which will pay better than unskilled 
labor. 


BENEFITS OF LIFE INSURANCE ESTATE 59 

(/) To make it possible for her to have all her 
time and strength for her children; to 
furnish support long enough to help her 
over the hardest period. 

(g) To provide her a sufficient income to care 
for the children until they are grown, so 
that they may receive proper education. 

( h ) To provide funds for maternity care and 
care of posthumous child. 

(i) To make her independent of her family or 

her husband’s family. 

(j) (If ample insurance can be provided) to 
enable her to continue to give the children 
what their father would have given them 
had he lived, thus carrying out the plans 
which she and her husband had made for 
their sons and daughters. 

( k ) Wedding, birthday, or Christmas anniver¬ 
sary annuities. 

IV. For the daughter: 

{a) An education—high school, college; voca¬ 
tional or professional training. 

( b ) As good a chance in life, if possible, as her 
father would have given her, had he lived. 

(c) Capital to start in profession or business. 

(d) An independent income for life, if possible, 
or for a limited period. 

(e) Special fund for travel as part of her 

education. 

(/) Birthday or Christmas annuity. 

(g) Dowry for wedding expenses. 


60 LIFE INSURANCE FUNDAMENTALS 

V. For the son: 

(a) An education—high school, college; voca¬ 
tional or professional training. 

(b) As good a chance in life, if possible, as his 
father would have given him, had he lived. 

(c) Capital to start in business or profession. 

(d) Special fund for travel as part of his 
education. 

(<e ) Annuity to commemorate some anniver¬ 
sary. 

VI. For the invalid child: 

Living expenses for life, in addition to regular 
provisions for children stated above. 

VII. For the expected baby: 

Special maternity expenses to assure the child, 
as nearly as possible, that its mother will 
live to care for it, wall be healthy, so as 
to nurse it properly, and that the child 
itself will be properly tended at birth and 
during its first year or two. 

VIII. Through life insurance the father may be 
able to guarantee to his family the main¬ 
tenance of his business for their support 
after his death. 

IX. Life insurance may enable the family to 

retain investments which will support 
them and enable them to hold impaired 
but promising investments until there is 
a good market for them or until they are 
yielding a good income. 


BENEFITS OF LIFE INSURANCE ESTATE 61 

X. Life insurance enables a son or daughter 
to receive a unit of estate which their 
father wants them to have without de¬ 
priving brothers and sisters of their right¬ 
ful share. 

B. Personal. 

I. Life insurance is an investment. 

(a) The life insurance investment is safe. 

(b) Life insurance offers a convenient invest¬ 
ment opportunity for those who wish to 
lay aside small or large annual savings, 
combining savings with insurance. 

( c ) Persons who receive large sums of money 
find in single premium endowments a 
satisfactory investment, enhanced in value 
by reason of the increase in the amount 
payable at death. 

(d) In event of early death, the profit from a 
life insurance policy is surprisingly large, 
and in case of death at any time the 
profit is satisfactory. 

(<?) Subtracting the cost of protection, endow¬ 
ment policies provide a most satisfactory 
return on all deposits made, considering 
the high character of the security. 

(/) It is an investment that cannot depreciate 
in monetary value. 

II. The values provide for emergencies. 

(a) By giving collateral value to policies for 
temporary loans in emergencies of any 


62 LIFE INSURANCE FUNDAMENTALS 

kind, especially for the payment of life 
insurance premiums. 

(b) Policy loans often help the insured in busi¬ 
ness, when his credit at banks is small, 
strained to the limit, or exhausted. 

(c) Loans are available in times of financial de¬ 

pression when the money market is tight. 

(d) Loans may be obtained without delay, 
publicity, commissions, or indorsement by 
another party. 

(e) The rate of interest is guaranteed in the 

contract. 

( 

III. Furnishes an easy and systematic way to 
save money. 

(< a ) To accumulate an estate. 

(< b ) To provide funds at a definite time to buy 
a home, engage in business, pay off a 
mortgage or other indebtedness, or to 
mature bonds. 

(c) To educate one’s children, provide a 

dowry for a daughter, or to meet any other 
considerable expense to be incurred at a 
definite time. 

( d) To provide an old-age fund for the pur¬ 
chase of a home or farm, or for investment. 

(e) To provide an old-age income for men and 
women by means of maturing endow¬ 
ments, deferred annuities, and income 
bonds. 

(/) To provide a life income in case of total 
and permanent disability. 


BENEFITS OF LIFE INSURANCE ESTATE 63 

IV. Life insurance enables one to have one’s 
estate held intact. 

(a) By payment of mortgages on property or 
loans on securities in case of death or 
old age. 

( b ) By payment of inheritance and income 
taxes. 

(c) By payment ofadministration costs. 

(1 d ) By payment of all bills and claims out¬ 
standing at time of death or incident to 
death either on personal or business 
account. 

V. Enables a man to avoid dividing units of his 

estate in providing for various members of 
his family. 

VI. Enables a father to insure himself compensa¬ 
tion for a son’s or daughter’s education and 
training by carrying a policy on the son or 
daughter. 

3. Advantages of life insurance for unmarried men and 
women. 

A. The young man: 

I. To protect a dependent mother, sister, or 
younger brothers. 

II. To establish the habit of saving. 

III. To create an estate which will square him 
with the world at his death. 

IV. To accumulate a fund for emergencies. 


64 LIFE INSURANCE FUNDAMENTALS 

V. To enable him to borrow money for an 
education. 

VI. Or to establish himself in business. 

VII. To accumulate capital to start in business. 

VIII. To protect his fiancee. 

IX. To prepare him for the responsibilities of 
the average man. 

(a) He will probably marry. 

( b ) He will probably have children. 

(c) He will probably buy a home and assume 

a mortgage. 

(< d ) He will probably have to borrow money 
for his business or for his family needs. 
(<?) If he doesn’t die prematurely, he will 
become an old man and need an old age 
income. ' 

IX. To help him get ahead in business. The 
young man who expects to succeed must: 

(a) Save money. 

( b ) Have self-control. 

(c) Have the habit of planning and working 

for the future. 

(d) Have a reputation with employers and 
bankers for being sensible, thrifty, and 
foresighted. 

(e) Develop “credit character.” 

The assumption of the responsibility of saving regu¬ 
larly to pay life insurance premiums will assist the 
young man materially in attaining success. 



BENEFITS OF LIFE INSURANCE ESTATE 65 

B. The old bachelor: 

I. To protect dependent mother and sisters. 

II. To create an estate to square him with the 

, world at his death. 

III. To accumulate a fund for emergencies. 

IV. To protect business interests and creditors. 

V. To create a sinking fund to provide for 
specific requirements in the future. 

VI. To produce an income in old age. 

VII. To increase his philanthropies. 

C. The unmarried woman. 

I. To protect dependents. 

II. To establish the habit of saving. 

III. To create an estate to square her with the 
world at her death. 

IV. To accumulate a fund for emergencies. 

V. To accumulate capital to start in business. 

VI. To provide a retirement income. 

VII. To help her get ahead in business. The 
young woman who wishes to succeed in busi¬ 
ness should 

(a) save money. 

(b) have self-control. 

(c) have the habit of planning and working 

for the future. 


66 LIFE INSURANCE FUNDAMENTALS 

(d) have a reputation with employers and 
bankers for being sensible, thrifty, and 
foresighted. 

(<?) develop “credit character.’’ 

4. Life insurance as an aid to business. 

A. Chief specific functions of business life insurance. 

I. During lifetime of the person insured. 

(a) Strengthens credit by guaranteeing pay¬ 
ment of bills and loans at death of “key” 
man. Lenders will loan more willingly, 
in larger amounts, and, sometimes, at 
more favorable rates, and for a longer 
time. 

( b ) Constantly increasing cash values create 
an emergency surplus to provide cash 
when bank credit is exhausted, curtailed, 
or withdrawn. It is wise to avoid dis¬ 
tributing profits too closely and to lay 
aside surplus every year. 

(c) Cash value of life policies or endowments 
may be used as sinking fund to mature 
long term indebtedness. 

(d) Endowment policies will provide money 
to retire bond issue at death or at ma¬ 
turity date of bonds. 

( e ) Cash values or matured endowments may 
provide funds for expansion or reorganiza¬ 
tion. 

(/) Cash values constitute an asset. 


BENEFITS OF LIFE INSURANCE ESTATE 67 

II. After the death of the person insured. 

(a) To pay the firm’s bills. 

(b) To liquidate loans and release collateral 

(c) To maintain credit as result of ( a ) and (b). 
(1 d ) To provide cash for operating expenses, if 

credit is curtailed or withdrawn or pend¬ 
ing establishment of new credit lines. 

(e) To provide funds for special expenses 
incident to reorganization. 

(/) To reimburse owners for losses in case 
business is closed out by forced or 
voluntary sale. 

( g ) To enable owners to continue business 
until advantageous sale can be made. 

(h) Provide funds to enable surviving owners 
to buy out interest of deceased owner. 

(i) To compensate family for deceased’s share 

which is automatically transferred to sur¬ 
viving owners by previous contract be¬ 
tween owners. 

(j) To eliminate ownership of stock by non¬ 

producing factors. 

( k ) To avoid rivals’ acquiring stock (with the 
right to inspect books, etc.). 

(/) To reduce the number of outstanding 
shares of stock. 

B. Persons to be insured for benefit of the business or 
individual owners or heirs: Any person by whose 
death the business might be seriously impaired. 

I. The sole owner of a business. 

II. The chief partner. 


68 LIFE INSURANCE FUNDAMENTALS 

III. All partners. 

IV. A valuable officer. 

V. A valuable employee or agent. 

VI. A person engaged to perform an important 
contract or mission. 

VII. A stockholder. 

C. Persons whose interests can he safeguarded by busi¬ 
ness life insurance: Any person having a 
financial interest in the business which might be 
impaired by the death of an owner, employee, 
agent, or person engaged to perform an impor¬ 
tant contract. 

I. During lifetime of person insured: 

(a) Sole owners. 

( b ) Partners. 

( c ) Stockholders of a corporation. 

( d ) Creditors, including holders of bonds. 

(e) Employees, agents, persons engaged to 
perform contracts. 

II. After death of the person insured. 

(a) Heirs of sole owners, partners, or stock¬ 
holders. 

(b) Surviving partners. 

(c ) Stockholders. 

(d) Creditors. 

(e) Agents. 

(/) Employees. 


BENEFITS OF LIFE INSURANCE ESTATE 69 

D. Beneficiaries to be named: 

I. Sole owners in favor of: 

(a) Their estates. 

( b) Their families. 

( c ) Specified creditors (usually by assignment). 

(d) Employees, agents, and persons for whom 
a contract is to be performed. 

II. Partners: 

(a) Major partner in favor of minor partner, 
who will need capital at death of the other. 

(b) Minor partner in favor of major partner 
if the former is indispensable because of 
his ability. 

(c) Each partner in favor of the firm. 

(d) Each partner in favor of the other. 

(e) Each partner in favor of his estate. 

(/) Each partner in favor of members of his 
family. 

(g) The partners jointly in favor of the firm. 

(h) A partner, or the partners separately or 
jointly, in favor of specified creditors 
(usually by assignment). 

(%) Partners in favor of employees, agents, or 
persons who are to perform a contract. 

III. Corporations: 

(a) The “key” officers in favor of the 
corporation. 

(b) The “key” officers in favor of creditors 

(usually by assignment). 


LIFE INSURANCE FUNDAMENTALS 

(c) The majority stockholders in favor of 

minority stockholders. 

(d) The minority stockholders in favor of 
their heirs or of each other for acquiring 
stock. 

(e) Stockholders in favor of the corporation. 
if) Stockholders in favor of “key” officers or 

experts. 

(g) Stockholders in favor of employees, agents, 
or persons who are to perform a contract. 

E. Special Business Functions. 

I. To enable one to borrow money on a con¬ 
tingent estate. 

II. To enable a lender of money on mortgages, 
by requiring life insurance on lives of bor¬ 
rowers, to guarantee payment of mortgage in 
cash. 

III. To relieve such lenders of the disagreeable 
task of foreclosing mortgages on the property 
of widows and children. 

IV. To enable banks and other lenders to guar¬ 
antee the repayment of loans in cash. 

V. To guarantee creditors the ultimate payment 
of bills for goods. 

VI. To enable trustees and guardians to have 
trust funds separated quickly from their per¬ 
sonal estate at death or converted into the 
most liquid form of asset—cash. To guarantee 
the original value of trust funds. 


BENEFITS OF LIFE INSURANCE ESTATE 71 
5. Philanthropic Bequests. 

A. Life insurance affords a simple and sure means of 

providing gifts or legacies for friends, servants, 
etc. 

B. It affords a splendid means of endowing schools, 

colleges, churches, hospitals, charity organiza¬ 
tions, and other institutions without drawing on 
personal funds during lifetime and without en¬ 
croaching on estate to be left to family. 

C. Enables persons of moderate means to assist in 

such enterprises on a much larger scale than 
they could otherwise do. 

D. Life insurance funds payable direct to such 

institutions are not subject to contest as is the 
case with wills. 














PART II 


DIAGNOSIS AND PRESCRIPTION 
Analysis of Four Typical Cases 



CHAPTER V 

THE PROSPECT’S “PICTURE” 

This chapter and chapters vi, vii, viii, and ix are reprinted from the 
author’s book, Analyzing Life Situations for Insurance Needs—The Case 
Methody which includes a study of preparation for analysis, and “how to 
talk needs,” as well as the analysis of several typical cases. (Published by 
Harper & Brothers.) 

i ♦ 

H OW can we discover an individual’s needs which 
may be satisfied through life insurance? Many 
of them seem obvious to us; but if we stop to consider 
any individual case, we shall see that we really find 
needs by analyzing information about the prospect. 
For example: An agent asks a prospect whether he is 
married, because he knows that a married man has 
needs to be filled by life insurance which an unmarried 
man has not. If the prospect is married, the next 
question is, “Have you any children?” Children’s 
future needs require the protection of life insurance 
in particular ways. If the prospect says he is not mar¬ 
ried, the agent probably asks if there are any dependents 
—mother, sister, or younger brother—for if there is 
a dependent, the prospect has needs which will require 
more life insurance than would be required if there were 
no one dependent on him. 

There are many other questions which we may ask to 
advantage. Is there a mortgage on the home? What 
are the prospect’s total annual taxes (federal income 
and local)? What is the estimated net estate which 


75 


76 LIFE INSURANCE FUNDAMENTALS 

the prospect would leave if he should die now, and 
where is his property located? What are his plans 
for his son and daughter? What kind of an education 
does he wish them to have? What amount of money 
does he ordinarily owe at the bank, or what is the max¬ 
imum amount of money he may owe to banks or trade 
creditors at any one time? These and many other 
questions will help us to determine the amount of money 
that will be required after the prospect’s death. Of 
course, there are many questions which cannot be asked 
until the agent has won his prospect’s confidence. 

NEEDS VARY WITH DIFFERENT PEOPLE 

Needs vary greatly with different individuals. Per¬ 
sons situated similarly will have much the same needs. 
Two married men earning about the same salary, 
having each two children, and having approximately 
the same amount of money saved up may require about 
the same insurance protection. Yet this is not certain. If 
their children are both boys or both girls of about the same 
ages, the needs of the two families may be the same. 
Suppose, however, that Mr. A has a boy 18 and a girl 
io years old, while Mr. B’s son and daughter are 5 
and 3 years old, respectively. The needs of Mr. 
B’s family for money after his death will probably 
be greater than the needs of Mr. A’s family after Mr. 
A’s death, because B’s children are younger than 
A’s. No doubt A’s son has finished high school or is at 
least in his fourth year at high school, whereas B’s 
boy is only 5 years old. If B should die this year, 
it would be thirteen or fourteen years before his son 


THE PROSPECTS “PICTURE” 


77 

would complete his high-school course. A’s daughter 
will require about eight more years before finishing 
high school, while it will take B’s daughter fifteen 
years more to finish. If both A and B should die now, 
it would take more money to support and educate 
B’s children than would be required for A’s. We 
might find that A has a large mortgage on his home 
and owes money to his bank secured by $20,000 of 
bonds, and that B has no such obligations. This 
additional information might reveal that, after all, 
A had greater life insurance requirements than B. 

Although A and B seem at first to be in quite similar 
situations, each having the same income, the same num¬ 
ber of children and about the same amount of savings, 
their needs demanding life insurance are different be¬ 
cause of the difference in the number of years’ income 
necessary to give their children a fair start in life. 
Also, if they wish their children to have a college 
education, still more money will be needed, if A and B 
die prematurely, than would be the case if they con¬ 
sidered a college education unnecessary. 

These illustrations show us, first, that needs vary 
with different individuals, and that the needs may be 
discovered only by securing and studying various 
details of information about the prospect’s situation. 
We should learn all we can about the prospect’s family, 
his business, his financial situation. No detail of in¬ 
formation which we obtain should be discarded. We 
should consider every item as forming a part of the 
total group of facts which pictures the prospect’s life. 
Suppose that Mr. C has a wife and three children and 
carries a large amount of insurance, sufficient, it seems, 


78 LIFE INSURANCE FUNDAMENTALS 

to provide an income for his wife and children, edu¬ 
cational funds for the children, cash payments to liqui¬ 
date debts, taxes, and other obligations. The agent may 
not see that Mr. C requires any more life insurance. 
But suppose he asks Mr. C, “Have you any dependent 
outside of your immediate family, ” and that Mr. C 
says, “Yes, I am sending my niece to school. She is 
a senior in the high school.” And suppose the agent 
asks, “Will she go to college?” and that Mr. C says, 
“Yes.” The agent has uncovered a new need for 
which life insurance will be required; viz., to furnish 
money for the niece’s education, if her uncle dies before 
she finishes college. 

Again, suppose Mr. C has secured what seems to be 
a sufficient amount of life insurance to provide for the 
living expenses and educational needs of his children, 
and the agent says, “Mr. C, there is something I feel 
I ought to ask you in the interest of your family. If a 
man dies leaving securities on deposit at his bank 
as collateral for a loan, it is, of course, obvious that the 
bank will be entitled to reimbursement for its loan by 
sale of the collateral, unless there is cash in the estate 
sufficient to release the securities. Most business men 
frequently have loans outstanding against collateral 
and I was wondering if this isn’t often true in your 
case. If Mr. C says he owes now, or sometimes owes, 
money secured in this way, the agent has discovered 
a new need requiring the aid of life insurance to furnish 
cash at C’s death, in order that his family may be in 
a position to release collateral securities. 

These examples illustrate the ease with which the 
agent may discover needs requiring the use of life 


THE PROSPECT’S “PICTURE” 


79 

insurance, if he can obtain information regarding the 
prospect’s situation. It may not always be easy to 
obtain complete details in a given case, but such 
information is so important that the life insurance 
salesman should be constantly on the alert to secure 
data about the personal, family, business, and financial 
situation of his prospects. 

THE “picture” 

A few years ago the writer adopted the word “pic¬ 
ture” to indicate the collective information obtained 
by the life underwriter regarding a prospect. The word 
has come into general use among the graduates of the 
college courses and will be used in the books published 
in the Harper’s Life Insurance Library. 

A real picture, a photograph or a painting, shows 
us what kind of person one is physically. The “pros¬ 
pect’s picture” gives us a good idea of what kind of 
man the prospect is in terms of his interests, activities, 
and responsibilities. For example, if a friend wished to 
give you a good idea of some person he wanted you to 
meet, he might show you a photograph so that you 
could see his physical features, but in order that you 
might understand what manner of man he was in other 
respects, your friend would tell you about this person’s 
interests, responsibilities, talents, abilities, his family 
relationships, and his business, perhaps even his hob¬ 
bies. If your friend says, “This man is 40 years old, 
married and has two small children, is owner of a knit¬ 
ting mill, earns #25,000 a year, has made #200,000 on 
real estate, is a college man, a Mason, and an earnest 


8o LIFE INSURANCE FUNDAMENTALS 

Red Cross worker/’ you may well feel that you have 
quite a good “picture” of the man. 

THE “picture” REVEALS INTERESTS 

It is easier to talk with a person of whose interests 
we know something, and the prospect’s “picture” 
would be very valuable to the life underwriter, even 
if it served no other purpose than to facilitate the 
opening and conduct of the interview by talking about 
things 'which concern the prospect and in which he is 
therefore interested. 

You have often had the following experience: 
You have been introduced to some one—say, Mr. 
Rodman—at some gathering or reception and entered 
into a conversation, starting with something with which 
both of you were familiar—the purpose of the gathering, 
the talents or personality of the host, or the weather. 
Almost immediately you have found yourself wondering 
who Mr. Rodman really was, where he lived, in what 
business or profession he was engaged. Perhaps you 
asked him point-blank if he lived “here,” and what 
his business was. And, in turn, Mr. Rodman was 
wondering about you and perhaps asking you similar 
questions. A little later your host appeared and you 
told him that you and Mr. Rodman “had been getting 
acquainted.” And how much easier it was for both 
of you to keep the conversation going once each had 
learned something of the other’s interests. 

If, before introducing you, your host had said, “Mr. 
Rodman is the secretary of the Water Board, and 
chairman of the local organization of the Red Cross; 
he is a Princeton graduate, and has a lot of money; he 



THE PROSPECT’S “PICTURE” 


81 


is also assistant treasurer of the Orient Manufacturing 
Company,” you would have found it much easier to 
begin your conversation. If your host had told you 
in advance that he was going to introduce you to Mr. 
Rodman, but had not volunteered the information, 
you would probably have said, “Who is Mr. Rodman?” 
or “Tell me something about him,” for you would have 
felt immediately that you would have a much “easier” 
time talking with him if you could know what man¬ 
ner of man he was—what his interests were. 

But the “picture” serves another very important 
purpose. As we have already seen, if, before attempt¬ 
ing to discuss life insurance with a prospect, we can 
know what are his responsibilities, his obligations, his 
problems, his purposes in life, we may be able to dis¬ 
cover the various needs which exist in his own life 
and the lives of those with whom he is connected by 
family or business ties and which may be satisfied by 
life insurance. 

Below we print a specimen “picture” card prepared 
at Carnegie Tech by one of Dr. John A. Stevenson’s 
classes in Practical Selling. At first the card may seem 
to some persons to be objectionable because of the many 
different kinds of information indicated and because ot 
the size of the card (8 inches by 5 inches). However, 
it is in constant use by life insurance students and 
graduates, and a good many agencies are using it 
regularly. Once the underwriter has begun to realize 
the value of “picture” details and that, often, it is 
some apparently insignificant bit of information that 
reveals the correct way to the prospect’s interests or 
to his needs, he may even think the card ought to be 


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84 LIFE INSURANCE FUNDAMENTALS 

larger than it is. The “picture” card is not to be 
carried about. It remains in the file, as the permanent 
repository of cumulative information about a prospect 
or an old client whose life insurance program is being 
developed over a period of years. Even though you 
may have insured a client several different times, his 
“picture” card should be kept and any new information 
about him should be entered on the card from time to 
time, so that you may on any occasion have before 
you the facts which may show how your client can be 
further served through life insurance. 

In the next few chapters we shall analyze the “pic¬ 
tures” of some typical cases. 


CHAPTER VI 

THE JOHN BROWNS—A THRIFTLESS FAMILY 


T HE first case to be analyzed is that of a person 
whom we shall call John Brown. You have known 
many John Browns, and you will meet more of them, 
with just such wives as Mrs. Brown and little children 
like the Browns’s baby girl. The following picture 
tells their story: 

Picture—John Brown, 30 years old. Is married and 
has one child, a girl 2 years old. Is chief clerk in a 
steel manufacturing company and receives a salary of 
#4,000 a year. Has never saved any money and has 
no estate. Carries no life insurance. Says he and his 
wife are still young and have plenty of time to save 
for the future. Says he “does not need any life in¬ 
surance”; Mrs. Brown was a milliner before she was 
married, and expects in case of her husband’s death 
to open a millinery shop and earn a good living for 
herself and child. The Browns live with Mrs. Brown’s 
parents, who are not in good circumstances. 

The Browns are typical of thousands of American 
families and in analyzing their needs we shall point 
out several that will be found in many other cases. 

NEEDS NEW ATTITUDE 

The first need we see is for a new attitude toward 
life . The Browns are spendthrifts. Their mental, as 

85 



86 LIFE INSURANCE FUNDAMENTALS 

well as their physical life, is thriftless. They have 
no conception of the value of time as a factor in per¬ 
manent success. Their chief purpose in life is “to 
have a good time”—to enjoy temporary pleasures 
without a thought of future happiness. They appre¬ 
ciate only the minor values of life. The larger values of 
life—orderly habits in their thinking and their living, 
contentment, foresight in dealing with their economic 
problems, laying a foundation for their daughter’s 
happiness, establishing the means of a comfortable 
rather than a wretched old age—these greater values 
of life now mean little to the Browns. They don’t 
realize that such things will bring much more real 
happiness and satisfaction than the little pleasures 
in which they are interested. 

Intimately connected with this need of a new at¬ 
titude toward life is the need for the habit of laying up 
whatever margin of Brown s earnings can be saved , by 
careful planning of their expenditures and the elim¬ 
ination of unnecessary expenses. Saving is the result 
of careful spending. The Browns would no doubt like 
to have an estate, but they do not truly desire a sub¬ 
stantial estate as much as they desire the trifles in which 
they are constantly indulging. It is obvious that they 
will never have any estate unless they modify their 
spending habits materially. They need to understand 
the greater value to them and to their child of money 
saved for the future, as against the value of the things 
on which they now fritter away their time and their 
money. Only then will they be disposed to save. 
But without a system to develop the habit of saving, 
they will never succeed. Some plan is necessary by 



A THRIFTLESS FAMILY 87 

which they can regulate their spending in such a way 
as to save money every month, over a long period of 
years. 

THRIFTY HABITS 

The saving habit will do mucfh more for the Browns 
than merely to make it possible to accumulate money. 
It will help, perhaps as much as anything else, to 
give them the new angle on life which they so greatly 
need. People who are thrifty in their finances are 
likely to be thrifty in other habits, even in their think¬ 
ing. Waste in any form may become abhorrent to 
the man who carefully and regularly saves his money, 
especially if he saves with worth-while purposes in mind. 

And it becomes easier to interest the man who is 
orderly in his living in what we have called the greater 
values of life. 

NEEDS TO GET AHEAD 

Brown needs to strengthen his chances for success. He 
has done fairly well thus far. At thirty he has $4,000 
a year and a position of some responsibility. Appar¬ 
ently his success thus far has been due to his ability. 
But the man who attains large and permanent business 
success must be careful to form certain habits which 
will be helpful in business. There can be little question 
but that the man who saves his money will, other things 
being equal, be a better man in business than the man 
who does not save. Thrift habits in personal affairs 
necessarily beget thrift in business affairs. Moreover, 
Brown’s employer will no doubt have a higher opinion 
of him if Brown settles down to a program of careful 
spending and saving. His banker will think, better of 


88 LIFE INSURANCE FUNDAMENTALS 

him and, as he accumulates an estate, a higher estimate 
of him as a business man will prevail in his community. 
The time may come when Brown will have a chance 
to make a good business connection requiring the in¬ 
vestment of some money. If he wants to accept it, he 
must have money of his own or he must be able to 
borrow. Unless he begins to save his money, he is not 
likely to have any funds when the need arises; and, 
unless he saves his money, he will not impress his banker 
nearly so favorably as a credit risk as he would if he had 
saved an amount which seemed fairly large, taking into 
account the size of his earnings and his opportunities 
to save. Lenders of money are greatly influenced by 
a man’s intentions and purposes. If Brown had tried 
to accumulate something, had saved all he could, but 
had been obliged to use his savings on account of illness 
in the family, or had suffered some investment loss 
which did not reflect seriously on his judgment, a banker 
would, nevertheless, grant a loan much more willingly 
than he would if he knew Brown had always been a 
spendthrift. A purpose and an effort to save are im¬ 
portant factors in establishing personal credit. 

NEEDS SAFETY IN EMERGENCIES 

Brown’s present situation is really deplorable. With 
no savings, no emergency fund, what would he do if 
he had a long illness. Unless his company was willing 
to continue his salary, he would have to borrow the 
money to pay the doctor’s fees and the hospital bills. 
There are thousands of families in which failure to save 
in times of good health and high earning power have 
resulted, in emergencies, in an accumulation of debts 


A THRIFTLESS FAMILY 


89 

which have not only handicapped the whole family, 
but have depressed them and lowered their morale. 
Young married people should save for the rainy day; 
for sooner or later it comes to everyone, and he who is 
not prepared for it may suffer permanently from its 
effects. The Browns need to accumulate a substantial 
emergency fund . 

OLD AGE PROVISION 

This suggests another need that can be satisfied 
only by spending carefully and saving regularly over 
a long period of time. The Browns are young now, 
but they will not always be so. Old age seems far 
away; the average young man or woman can hardly 
picture himself or herself as an old man or an old woman. 
Perhaps it is fortunate for many reasons that young 
people take such a rosy view of life. But, in one sense, 
it is unfortunate that young people can't realize how 
short life is; that even three-score years and ten pass 
quickly, and that the years of strength and talent are 
none too long to prepare against old-age dependency. 
Of a large number of persons in good health at thirty 
to thirty-five years of age, about one-half of the total 
number will live to be seventy years old. And how 
many of them will be prepared to spend their old 
age in reasonable comfort and peace? Statistics give 
a sad answer to this question. The vast majority 
of men who attain sixty to seventy years of age are 
dependent on other people. Because of ill health or 
failing mind or a decrease in ability, they are obliged 
to give up their work; or they fail in business, or lose 
their positions. 


9 o LIFE INSURANCE FUNDAMENTALS 

Most old men and women are unhappy, living on 
the bounty of their children or other relatives , occupying 
homes for old men and women or eking out a poor living 
by some unpleasant employment . No doubt, a great 
many of them have been comfortable in the past and could 
have laid by something for their old age had they been 
willing to make the necessary sacrifices. Mr. and Mrs. 
Brown need to begin saving now for their old age . 

LIFE INSURANCE REJECTED 

Brown carries no life insurance. Mrs. Brown does 
not see the necessity for it and he agrees with her. 
They reject life insurance as a needless “ expense” 
that would deprive them of other things. Mrs. Brown 
thinks she has solved the problem of income after her 
husband’s death. She was a milliner before she mar¬ 
ried, and says that, if her husband dies, she can earn 
a satisfactory living for herself and her daughter by 
opening a millinery shop. It is true that many women 
have done such a thing; but let us see whether there are 
needs for which this plan might not provide. 

In discussing life insurance with a prospect , it is 
usually helpful to begin with some idea or plan in which 
the prospect is already interested. We find that the 
Browns have already decided that they will depend on 
Mrs. Brown’s ability to earn a living in case of Brown’s 
death. Here is an interest, or plan, already established. 
Let us see if it can be linked up with life insurance. 

THE NEED OF CAPITAL 

Even from the Browns’ own point of view, life insur¬ 
ance seems to be indispensable. Suppose Brown dies 


A THRIFTLESS FAMILY 91 

and that Mrs. Brown decides to open a millinery shop. 
She will require capital. She must rent a shop, buy 
fixtures and furnishings, purchase a stock of goods and, 
perhaps, employ some help. Then, unless she has 
unusually good fortune, there will be a period during 
which she will not earn very much. Her place must 
become known. Buyers accustomed to go elsewhere 
will only gradually transfer their patronage to her 
shop. It takes time to build up a satisfactory trade. 
Capital will be needed to open the shop , keep it running , 
and provide for living expenses , until Mrs. Brown has 
had time to build up her business to a point of profit 
large enough to pay her own living expenses and those 
of her daughter. We may congratulate Brown upon 
having a wife who is competent and willing to support 
herself and her daughter in this way; yet we should 
point out to him that their plans cannot succeed unless 
there is capital. Since they do not wish to deprive 
themselves by saving a large part of their income, he 
should at least save a little and use the money to carry a 
few thousand dollars of life insurance to provide the capital 
to start the shop and keep it going until Mrs. Brown 
has had time to build up a business. 

FINAL EXPENSES 

But suppose that Brown provides, say, #3000 of 
life insurance for this purpose and that he dies. What 
then? Mrs. Brown will undoubtedly find that her 
capital will not all be available for the millinery busi¬ 
ness. Brown was ill for, say, two or three months, 
and perhaps had an operation. Mrs. Brown finds that 
she has a lot of bills to pay—doctors’ bills, the surgeon’s 


92 LIFE INSURANCE FUNDAMENTALS 

bill, medicine bills, hospital bills and bills for nursing, 
food, and other expenses. What a lot of money it costs 
to be ill and to die! Funeral expenses are high. The 
Browns didn’t own a lot in the cemetery and Mrs. 
Brown had to buy one. During Brown’s illness bills 
accumulated at all the stores. Mrs. Brown pays them. 
There was $3,000 to provide capital to start the little 
shop. More than half of it is already spent; and the 
widow is in no condition to undertake a business at 
this time. She must wait until she can get rest and 
recover from the numb pain that seems to possess her 
mind and body. She and her husband had been living 
at the rate of over $300 a month. She reduces ex¬ 
penses in every way possible to, say, $125 a month. 
Six months elapse. Her capital has shrunk to about 
$75°. 

Brown and his wife can both see that what would 
really happen would be something like the above. The 
money intended for capital wouldn’t suffice. If he dies 
Mrs. Brown ought to have at hand enough life insurance 
money to square Brown with the world , to pay her living 
expenses for six months or a year , and to furnish $3,000 
or $4,000 clear with which to set up in business. 

IF MRS. BROWN DIED 

Let us assume that this is done. Is the plan now 
made safe? Did you ever hear of a wife or a husband 
dying within a comparatively short time after the other 
had passed away? It isn’t an uncommon occurrence. 
Suppose that Mrs. Brown has enough money at her 
husband’s death to pay all outstanding bills and funeral 
expenses and to buy a lot in the cemetery, that she uses 


A THRIFTLESS FAMILY 


93 

her capital to start the millinery shop, and the busi¬ 
ness succeeds, but that she dies while the child is still 
young. In this case, the Browns’ plan will fail. After 
all, the real problem is to make it possible for Mrs. 
Brown to see that the child is taken care of until it is 
grown, and that it receives a proper education. If 
she should die while the child is still young (and this is 
possible) how will the child be cared for? Perhaps the 
grandparents will look after her. But from the “pic¬ 
ture,” we see that they are not in good circumstances. 
They probably will not be able to give Brown’s daughter 
the advantages he wants her to have. And they are 
no longer young. If the grandfather dies or becomes 
incapacitated, the child might, at a tender age, find it 
necessary to go to work to help the grandparents. 
Such a situation would not be a strange or unusual one. 
There are thousands and thousands of similar cases in 
the world all the time. 

Mrs. Brown might not die before her daughter grew 
up. But she might have a long illness, or her health 
might fail to such an extent that she would lose her 
business. Or, the business might fail, even if she kept 
her health. Such shops are being opened and closed 
year in and year out in all our cities. 

So life insurance is needed to enable the Browns to 
guarantee capital for the millinery shop, to pay off 
bills at his death, so that the capital will not be used for 
this purpose; also to furnish a certain amount for living 
expenses so that if Mrs. Brown has a long illness, she 
and the child will not be destitute, and to guarantee 
that, if Mrs. Brown, too , dies, the little daughter will 
have something to live on. 


94 LIFE INSURANCE FUNDAMENTALS 

THE CHILD’S GREATEST NEED 

The Browns’ plan to depend on Mrs. Brown’s success 
in a millinery business causes us to think of a most 
important need which has probably never occurred 
to them, as it rarely occurs to many other fathers 
and mothers. What will Brown’s child need more than 
anything else, if its father dies? When Brown, at 
his business, thinks of home, he thinks of mother and 
child. The average mother and a young child are 
practically inseparable, except after the little one’s 
bedtime has come. Even the mother who has a nurse 
for her babies is with them or near them most of the 
time, watching out for their welfare in every particular. 
If Mrs. Brown should die, her little daughter would 
lose that great advantage enjoyed by the child who 
grows up under its mother’s eyes. A child can sustain 
no greater loss than the death of its mother. If 
Mrs. Brown should suggest spending most of her time 
away from home and leaving her baby now to some one 
else to look after, Brown would realize how keenly he 
feels the need of his child for its mother. Yet he has 
allowed his wife to propose, and he has accepted, a 
plan (contingent on his death) which would result in 
just what he knows would be a very unfortunate thing 
for his daughter. If Mrs. Brown runs the millinery 
shop, how can she give her child proper care ? Brown s 
child needs its mother s time now and , if Brown dies , will 
need its mother s time even more than now . It will need 
the mother s supervision of its physical , mental , and moral 
welfare. Nobody else will do for the child what its 
mother will do. No nurse or governess or friend, nor 


A THRIFTLESS FAMILY 


95 

even an aunt or grandmother will, as a rule, do for the 
child what its mother would do. There is no advan¬ 
tage Brown can give his little daughter that she will 
need more, if anything happens to Brown, than to 
guarantee that she can have her mother’s time. Life 
insurance should be used to keep Mrs. Brown free of 
any responsibility that may deprive her baby of a 
chance to have good health, and to be well educated, 
and to grow up under proper moral influences. 

THE NEED OF INCOME PROTECTION 

The “picture” reveals another point to be carefully 
considered. Mrs. Brown’s parents, with whom the 
Browns are living, are not in good circumstances. Sup¬ 
pose Brown left life insurance payable in a lump sum. 
The needs of Mrs. Brown’s parents might be such as 
to cause her to spend a considerable part of her life- 
insurance money trying to help them. Her father 
might become unable to earn any income. There 
might be a serious illness, an operation, need of a change 
of climate for the father or mother or both of them. 
Would it, or would it not, be natural for Mrs. Brown 
to spend her money to help her aged parents ? If Brown 
wants to assure his wife and child the means to pay 
their living expenses until the little daughter is grown 
up, he should provide an income payable monthly 
for a specified number of years, rather than a lump 
sum. 

After all, then, wouldn’t it be better if the Browns 
would abandon the idea of having Mrs. Brown support 
the child, in case of Brown’s death, and, instead of 
leaving capital with which to open a shop, concen- 


96 LIFE INSURANCE FUNDAMENTALS 

trate their savings on a plan to assure Mrs. Brown an 
income for living expenses at least until the child is 
grown. It would also be wise to leave a certain amount 
at Brown’s death in cash to pay his final expenses. 


SUMMARY 


Needs 

Mrs. Brown: 

1. She will need money to pay outstanding bills at 
Brown’s death. 

2. She will need money to pay Brown’s doctors’ 
bills and funeral expenses and buy a cemetery 
lot. 

3. She will need money every month to pay living 
expenses. 

The Child: 

1. The child will need support until she is grown. 

2. She will need her mother’s time and care more than 
anything else, and she can have them only if her 
mother is free from the necessity of working. 

3. She will need an education and should be free of 
the necessity of working, at least until she has 
finished high school. 


Brown: 

1. Needs to cultivate the habit of thrift if he expects 
to be permanently successful. 

2. He needs to build up a fund for emergencies. 

3. He needs to create an estate for his old age. 


A THRIFTLESS FAMILY 


97 

Life Insurance Requirements to Satisfy Above Needs: 

1. Cash payable at Brown’s death to pay 

outstanding bills, doctors’ bills, funeral 
expenses, and for emergencies, say. #2,000 

2. Small income for Mrs. Brown, payable for 
life if possible—To provide #25 monthly, 
on interest option, say, at per cent, 

will require about. 7,000 

3. Additional income for twenty years to en¬ 
able her to take good care of child and 
train and educate her properly—To pro¬ 
vide average amount of about #75 a 
month for twenty years only, assuming 
surplus interest of, say, 1^2 per cent, will 


require about. 13,000 

Total. #22,000 

Program: 


The Browns should save at least 20 per cent of their 
income, #800, and Brown should invest #500 or #600 
a year in ordinary life or long endowment insurance. 
At age 30, #22,000 will require an initial annual deposit 
(participating 3-per-cent basis) of about #520 on the 
ordinary life plan, or about #630 for endowment ma¬ 
turing at age 65 (nonparticipating rates, 3^ per cent, 
about #100 less than the initial participating premiums, 
3 per cent.) 

Settlements at death: 

#2,000 in cash. 

#7,000 at interest until Mrs. Brown is fifty years old, 








98 LIFE INSURANCE FUNDAMENTALS 

then in continuous installments, twenty years 
certain, if she then prefers it. 

$13,000 in twenty years installments certain. 

Total amount of monthly income for twenty years 
about $100, and $25 to $30 thereafter for life. 
The child should be named as contingent bene¬ 
ficiary for all the insurance. 


Cash value at age 65— 

Ordinary life—22 X $549. $12,078 

Endowment, 65. $22,000 


The plan to recommend will depend on how Brown's 
interest develops— i. e. 9 whether the agent's discussion 
arouses interest chiefly in the protection for his family 
or in saving for his old age. The analysis of the case 
indicates that it will be best to develop, first, protection 
for the child, then for the mother in order that she may 
help the child, and, finally, for old-age savings and the 
value of habits of thrift. 

LIFE-INCOME PLAN 

Instead of a simple ordinary life or long endowment 
policy with income settlements, it might be desirable 
to use one of these plans in connection with the de¬ 
ferred survivorship annuity, commonly known as the 
monthly income policy or the continuous-installment 
policy. A given amount of premiums on this plan 
would give Mrs. Brown (now probably about 28 years 
old) a larger income than a continuous-installment 
settlement under a regular life or endowment policy, 
provided Brown died during the next twenty-two or 
twenty-three years. If Brown survived twenty-two 





A THRIFTLESS FAMILY 


99 

or twenty-three years the continuous-installment option 
under the regular life or endowment policy would pay 
a larger income than the monthly income policy. 

It is more important to provide the maximum pos¬ 
sible income while the child is young, rather than after 
it is grown, and the monthly income policy might well 
be recommended. 

On the other hand, since cash values (for a given 
premium) are larger on regular life and endowment 
policies than on the monthly income policies, if Brown 
should become greatly interested in the old-age provi¬ 
sion the regular policies might be preferable. 

FOR IMMEDIATE ACTION 

Eventually the entire program should be sold to 
Brown, if possible, as a plan that will not only protect 
his child and his wife and enable him to save some 
money for himself, but will also make it possible for 
him to spend the rest of his money, if he feels he must, 
without any fear as to the welfare of the family in case 
of his death. 

At first, however, since the complete minimum 
program will look very large to such a spendthrift, 
it would probably be wise to begin by submitting, say, 
$7,000 to supply $2,000 cash for final expenses and 
emergencies and $5,000 to furnish capital or to provide 
an income of 5 X $65.25 = $326.25 a year, or a little 
over $27 a month to pay the rent of a small apartment 
for twenty years. 

Or, Brown might be willing to invest about $350 to 
$375 a year in life insurance, in which case we might 
recommend $15,000 of ordinary life or long endowment 


> j 
) 5 > 


ioo LIFE INSURANCE FUNDAMENTALS 

—$2,000 for final expenses and $13,000 payable about 
$70 a month (plus interest) for twenty years. This 
would pay rent and groceries for twenty years. Or 
$5,000 could be used for business capital, and the bal¬ 
ance of $8,000 would pay nearly $45 a month for twenty 
years. 

Only in rare instances is it likely that, in such a case 
as John Brown’s, the entire program would be assumed 
at the start. 



< < c 


CHAPTER VII 

THE PAUL MILLERS—A THRIFTY FAMILY 


I T is unfortunate that there are not more people 
like Paul Miller 1 and his wife, whose case we shall 
study in this chapter. They are good citizens and 
set a fine example for their child to follow. 

Picture—Paul Miller, 27 years old; wife, 25; one child 
2 years old. Is a traveling salesman, earning a salary 
of #3,000 a year. He has bought a house for #8,000, 
on which he still owes #5,000, that is to be paid on the 
installment plan at the rate of #600 a year. Interest 
on mortgage is 7 per cent. He carries no life insurance. 

CHIEF INTEREST IS THE HOME 

The first point we observe in considering the Miller 
family is that their attitude toward life is in marked 
contrast to that of the John Browns. The Millers 
realize the value of foresight and thrift. They are 
already saving their money. Although not yet thirty 
years old, they have a definite objective—a home—for 
which they are glad to make a sacrifice of temporary 
pleasures. They have been married only a few years, 
yet they have paid #3,000 on their #8,000 home. They 
may have had a couple of thousand dollars for the first 

1 This case, under a different name, was discussed by another writer in 
an insurance journal some months ago. However, it originated in the 
writer’s classes at Carnegie Tech and has been used there for the past 
three years. 

IOI 





102 LIFE INSURANCE FUNDAMENTALS 

payment; but they have probably made at least one 
or two payments of $600 each on account of their mort¬ 
gage. They still owe $5,000, and are to reduce this at 
the rate of $600 a year. It will require eight years and 
four months longer to complete the principal payments 
at this rate. Thus they have laid out a definite 
savings program for several years ahead. With an 
income of only $3,000 a year, it is apparent that, in 
order to live comfortably and keep up the payments on 
the principal, as well as interest payments, the Millers 
must plan their expenses carefully. It is clear that one 
of the Millers’ chief interests is their home. Probably 
no other investment would interest them so much. 
They attach to the home more than a financial interest. 
It possesses for them also a sentimental interest. They 
love the house, enjoy the feeling of ownership, the 
sense of security, which it affords. It is, therefore, 
reasonable to assume that the life insurance need which 
the Millers would feel most keenly would be a provision 
to guarantee that Mrs. Miller and the child would 
own the home, have it all paid for, if anything happened 
to Miller. 

In considering any case, it is wise, as stated in the 
Brown case, to begin with needs suggested by some 
interest which the prospect already has. In the 
Browns’ case, we saw that they had adopted the 
idea that Mrs. Brown would earn a living for herself 
and daughter if Brown died prematurely, and we first 
pointed out the need of capital to start the business. 
The Millers have a splendid plan to own their home 
and that suggests the need of money to pay off the 
mortgage if Miller dies, so that the wife and child may 


A THRIFTY FAMILY 103 

own the property clear of all indebtedness and have 
a home assured them. 

It is not certain that Mrs. Miller and the child ought 
to occupy their home after Miller’s death. Much will 
depend on how far Miller can go in providing expenses 
for maintaining such a home. He knows that it takes 
considerable money to run his house. If he can’t 
leave his wife a sufficient income, she may be obliged 
to rent the house or sell it. But the mortgage insurance 
would b.e just as important, if Mrs. Miller were not 
to occupy it, as if she should do so; for unless the mort¬ 
gage could be paid, there might be a forced sale with a 
shrinkage in Mrs. Miller’s equity; and if Miller has 
bought his house under a certain type of installment 
contract (we hope he has not), the equity will be lost 
unless all payments are completed. With the mort¬ 
gage paid off, in case it were necessary to sell the house 
Mrs. Miller could wait for a good real-estate market 
or for a buyer who wanted her house so much that he 
would pay a good price. If she could, in good time, 
sell it for $8,000, this money, properly invested, would 
pay her, at 5 per cent, $400 a year, about $33 a month, 
for which she could probably rent a small heated apart¬ 
ment or rooms. 

It is probable, however, that Miller would expect 
that his family would continue to live in their home in 
case of his death. 

KEEPING THE HOME INTACT 

With the mortgage provided for, Miller would regret 
to have anything happen that might impair his wife’s 
interest in the home. Yet if he provides only enough 


104 LIFE INSURANCE FUNDAMENTALS 

life insurance in cash to pay the mortgage, she may not 
be able to keep the house free from debt. When Miller 
dies, there will be a good many bills to pay, amounting 
to a considerable total. Funeral expenses will require 
several hundred dollars; it may be necessary to buy a 
lot in the cemetery; there will be doctors’ bills and 
possibly a surgeon’s bill and hospital and nurses’ bills. 
Accumulated bills at the grocery, the drug store, the 
department store and many other accounts will have 
to be settled. The total may well reach from $1,500 
to $2,000; and when all these things are paid for, there 
may not be enough money left to pay off the mortgage, 
certainly not if Miller should die soon. There is need 
for life insurance to cover all these cash requirements , 
at Miller s death , in addition to the mortgage. If the 
mortgage were paid off before Miller died and he left 
no life insurance, Mrs. Miller might find it necessary 
to borrow money on a new mortgage in order to pay 
the various bills. From whatever angle we view the 
situation, life insurance will be needed to protect the 
home, in which the Millers are so deeply interested. 

TAXES AND LIVING EXPENSES 

So far as we know, Miller’s equity in his home con¬ 
stitutes his only estate. With the mortgage lifted his 
family would have the greater part of their rent paid 
for life—most of it, but not all, for there would be taxes, 
fire insurance, and repairs to pay annually. There 
must be a certain amount of income from some source 
to complete the “rent” by paying these costs. 

Then there will be other regular living expenses from 
month to month. The house must be heated in the win- 



A THRIFTY FAMILY 105 

ter, and it will cost something to run the kitchen range. 
The house must be lighted at night. There will be 
grocery bills to pay. While the child is young, it should 
have at least a quart of milk a day. At fifteen cents 
a quart, it will require $1,000 safely invested at 5^ 
per cent to provide one quart of milk a day, year in and 
year out. At fifteen cents for a full sized loaf of bread, 
it will take another $1,000 safely invested at 5^2 per 
cent to provide one loaf a day, year in and year out. 
In addition to groceries, meat, and milk, there will be 
incidental housekeeping bills, new clothing must be 
bought from time to time. There will be doctors’ 
and dentists’ bills, and there will be some expense 
incurred for the child’s education, etc.; there must be 
provision for recreation and there should be some al¬ 
lowance for a little vacation every summer, a change 
to the country or the seashore for a few weeks. 

THE CHILD’S NEEDS 

Suppose Miller should die within the year. The 
child is only two years old. For the next sixteen or 
seventeen years at least Mrs. Miller should be in a 
position to take care of the child comfortably without 
its having to aid in the family support. This would 
enable it to go through high school. It would, of course, 
be still better if Mrs. Miller could support the child 
completely until it was, say, 20 years old, in order that 
it might have the advantages of special vocational 
training after finishing the high-school course. 

Just as we saw in the Brown case, there is here also 
the need of the child for its mother’s time and care; Mrs. 
Miller should, if possible, be relieved of the necessity 


106 LIFE INSURANCE FUNDAMENTALS 

of earning money for her living expenses while the child 
is growing up. It appears, then, that there ought 
to be life insurance to enable Mrs. Miller to keep up 
the house and to pay all the other living expenses, at 
least until the child has finished its education. After¬ 
wards, it would also be desirable, if it could be ar¬ 
ranged, for her to have a certain smaller provision 
for her own living expenses. 

PRINCIPAL NEEDS 

The chief needs we see in the Miller case which 
could well be provided for by means of life insurance 
are (i) cash to lift the mortgage, (2) cash to pay funeral 
expenses, doctors’ bills, etc., (3) cash to pay outstand¬ 
ing bills, (4) a monthly income for payment of bills 
for groceries, clothing, medical care, and incidental 
expenses, and for taxes, fire insurance, and repairs on 
the home. The monthly income should be sufficient 
to provide for both mother and child until the child 
is 18 or 20 years old. There should also be a small 
income paid to Mrs. Miller during the balance of her 
life. She is now 25 years old. She will be 45 when the 
child reaches age 20. Unless she is a woman of consid¬ 
erable ability or has had special training or previous 
business experience, she would at this age find it hard 
to earn a good living. It may be difficult for Miller 
to provide a life income for his wife, but this is clearly 
one of the needs we see. 

WHAT CAN MILLER AFFORD? 

Needing or desiring something and being able to 
afford it are two quite different things. Miller, with 


A THRIFTY FAMILY 107 

his attitude toward life, will probably be very much 
interested in the analysis of his life insurance needs. 
It is quite likely that he will recognize all of the sugges¬ 
tions as being reasonable, but the next thought that 
will come to his mind, as well as to the mind of the life 
underwriter, will be how far he can go toward adopting 
this program. Perhaps we may find that he can’t 
adopt an adequate program as indicated above. Pos¬ 
sibly he can do much more than he thinks. This ques¬ 
tion must be decided by Miller, but the underwriter 
should help him with suggestions. 

If Miller will budget his expenses, he may accurately 
determine how much he can invest in life insurance. 
He earns a salary of $3,000 a year. As he is a traveling 
salesman, we may assume that his board is paid while 
he is away from home. 

He is paying $600 a year on his mortgage. His in¬ 
terest the first year will be 7 per cent on $5000, or 
$350. Taxes will vary, according to where he lives. 
In the suburbs of Pittsburgh, they would probably 
be about $150 a year. Fire insurance will cost $10 a 
year and, if the house is a new one, repairs may not 
exceed $50 a year provided Miller attends to all the 
easy repairs himself. This makes a total of $1,150, 
leaving a balance of income amounting to $1,850. 

UNITED STATES TREASURY THRIFT BUDGET 

The United States Treasury thrift budget for a fam¬ 
ily of three with an income of $3,000 a year provides 
for a total of rent and savings amounting to about 
$1,000. Miller’s rent (taxes, interest, and upkeep) and 
savings ($600) amount to about $1,150; so he has $150 


108 LIFE INSURANCE FUNDAMENTALS 

£3,000 a Year—£250 a Month 


Number in the Family 



Two 

Three 

Four 

Five 

Savings. 

$6$ 

$S3 

£40 

$30 

Taxes (federal income). 

5 

4 

3 

2 

Rent. 


30 

35 

35 

Food. 

J 

40 

48 

J J 

56 

64 

Clothing. 

T 

30 

T 

33 

J 

3<5 

39 

Housekeeping expenses. 

25 

30 

32 

32 

Churches, charities. 

19 

17 

16 

16 

Health, recreation, education. 

18 

18 

16 

16 

Personal, miscellaneous. 

18 

17 

16 

1 6 

Total for month. 

$ 25 ° 

$ 250 

$250 

$250 


a year less remaining for other provisions than he would 
have if he followed the United States Treasury budget. 
Moreover, the United States Treasury budget makes 
no special mention of life insurance. This is, no doubt 
covered by the general item of savings, $636 a year, 
just about the amount Miller is saving by annual 
payment on his mortgage. If Miller carries a substan¬ 
tial life insurance, he and his wife must adopt a more 
economical scale of living than the United States 
Treasury budget. It will be.difficult; yet it is possible. 
Perhaps they can and will do it. As Miller is traveling 
most of the time, they may be able to save, say, one- 
fourth of the food allowance, #48, for which the budget 
provides. That makes $12 a month, or $144 a year. 
They might save $10 a month, or $120 a year more, 
from other items. This would make a total of $264, 
which is probably as much as we could expect the Mil¬ 
lers to save, under the circumstances. But they can 
do it, barring serious illness. If they have heavy 




























A THRIFTY FAMILY 109 

doctors’ bills, they will probably be obliged to borrow 
the money, or to pay off the bills gradually. 

The author is well acquainted with a man whose 
financial situation is practically identical with Paul 
Miller’s and who saves $400 a year for life insurance; 
yet by good management he and his wife and child 
are living comfortably and are highly respected in their 
community. 

MORE MONEY FOR LIFE INSURANCE 

Next year and each year thereafter for several years 
Miller will have a little more money for life insurance 
than he has now. Each payment of $600 on the mort¬ 
gage reduces his interest charges by 7 per cent of #600, 
or $42. Every year for the next eight and one-third 
years, if he pays off $600 on the mortgage, he will have 
$42 less interest to pay than he paid the year before. 
The money released in this way will increase year by 
year as follows, $42, $84, $126, #168, $210, $252, $294, 
#336, $350 ($14 being released on the last $200 mort¬ 
gage payment in the ninth year). As only $200 will 
be required to make the last payment on the mortgage, 
$400 previously paid annually on the.mortgage will be 
released, increasing the total available by the end of 
the ninth year to $750 (annual interest $350, plus $400) 
over and above what Miller might be able to invest 
in life insurance now; and in the tenth year this will 
be increased by another $200, a total increase of $950 
in the ten years, since in that year there will be no 
mortgage payment due. 

It is probable that Miller’s living expenses may be 
unavoidably increased in the coming ten years. His 


no LIFE INSURANCE FUNDAMENTALS 

child will be older. There may be other children. 
Yet we may reasonably expect that a young man who 
is progressing as Miller is will gradually increase his 
earnings sufficiently to provide for a normal growth 
in expenses. 

DESIRABLE PROGRAM 

Miller’s general attitude of conservatism encourages 
us to present life insurance to him as a means of saving 
further sums of money for three purposes: (i) to guar¬ 
antee the home to his wife and child, in case he dies 
prematurely; (2) to guarantee the payment of taxes, 
fire insurance and repairs, and to provide for the living 
expenses for his wife and child, in case of his premature 
death; (3) to guarantee the education of his child, and 
(4) to provide an old-age income. With the home all 
paid for, a provision for living expenses for his family, 
if he dies, or for himself and family, if he lives, is ideal 
and completes perfectly the objective Miller and his 
wife have of being independent in their own home. 

Within a few years Miller will be financially able to 
carry a very substantial life insurance program on a 
plan calculated to provide amply for his own old age. 
He should, if possible , have a minimum program 
somewhat like the following: 

MINIMUM EVENTUAL PROGRAM 

1. $ 5,000 cash to lift the mortgage. 

2. $ 2,000 cash for final expenses and emergencies. 

J. $10,000 payable in twenty installments certain, 

about $652 a year (3 per cent). 


A THRIFTY FAMILY 


hi 


4. $14,000 at interest to yield about $600 a year at 
an assumed rate of 4^ per cent, to provide a life 
income for wife. 1 
Total $31,000 

The above program would clear the mortgage, pay 
outstanding bills and funeral expenses, probably furnish 
a small emergency fund, and provide a minimum of 
about $100 a month for twenty years and approximately 
$50 a month thereafter as long as Mrs. Miller lived, 
3 per cent interest being guaranteed and assuming 
surplus interest of per cent. But $31,000 is too 
large a program for Miller just now. He should adopt 
it in principle and gradually build up to it. Ten years 
from now it will be easy, if things work out as expected. 
But what shall he do now? 

PRESENT PROGRAM 

Whatever insurance is taken now should be considered 
as the first step in a more complete program to be worked 
out as soon as financial circumstances will permit . 

It would probably be best for Miller to choose his 
permanent plan of insurance—ordinary or thirty-pay¬ 
ment life or an endowment maturing at age sixty-five 
or seventy—take $1,000 or $2,000 on this plan and then 
put as much money as he can into ten-year term in¬ 
surance. The idea of having a small amount of per¬ 
manent insurance is that he will have made the beginning 
on the final program of life or long endowment , to which 
the term insurance will gradually be converted . One 

1 Since Mrs. Miller is young, we recommend the interest income rather 
than the continuous installment plan. The policy might well provide that 
she may have the choice of either plan at any time after she reaches 45 or 
50 years of age. 



112 LIFE INSURANCE FUNDAMENTALS 

thousand dollars of ordinary life would require a first 
deposit of about $21, and thirty-payment life about $25, 
while a thirty-five-year endowment would require about 
$27. If Miller can save $260 for life insurance this 
would leave about $235 for a ten-year term. At about 
$12.50 per $1,000, $235 would carry about $19,000 of 
ten-year-term insurance. Miller would have a total of, 
say, $20,000, with only $1,000 on the permanent plan, 
and $19,000 on the term plan. But he should he “sold” 
orginally on the permanent plan f and then on the use of 
term insurance to initiate the permanent insurance. 

(The above rates are the first-year deposits for par¬ 
ticipating policies, to be reduced by dividends. Of 
course, non-participating rates are somewhat low r er 
than the first-year participating premiums.) 

Twenty thousand dollars of ordinary life would mean 
a premium of about $420 a year; the thirty-five-year 
endowment would take about $540. If Miller can put 
$260 a year into the insurance now, the decreasing 
interest on his mortgage and the dividends on his 
$20,000 of insurance will release enough money annually 
so that practically all the term insurance could be con¬ 
verted to ordinary life or long-term endowment within 
seven years, the time within which most companies 
require conversion of ten-year term policies. (Some 
companies allow conversion at any time within the ten- 
year period.) No doubt Miller’s situation six or seven 
years from now would permit him to complete his con¬ 
versions. If not, he could borrow enough on the con¬ 
verted policies to convert the balance of his insurance 
within the time limit. 

The plan of converting the term insurance into ordi- 


A THRIFTY FAMILY 


113 

nary life or long-term endowment should be worked 
out carefully. Separate term policies of $2,000 or 
$3,000 each may be issued, so as to simplify gradual 
conversions. Each year the $42 released by the de¬ 
crease in mortgage interest would make it possible to 
convert about $3,000. (Term rate $37.504-$42 = 
$79-5°-) In the ninth year of this program, there will 
be only about $5 of interest to pay on the final $200 for 
four months. Thus, $37 of interest money will be 
available and as only $200 is due on the mortgage 
instead of $600, there will be $400 more of Miller’s 
savings released, a total of $437. Therefore, by the 
end of the ninth year Miller may add the balance of 
his total program of $31,000, and more, too, if it seems 
desirable for him to do so, without drawing on any 
funds in excess of what he had previously paid on his 
home-purchase contract. 

PLAN OF SETTLEMENTS 

We should suggest a definite method of paying the 
$20,000 to Mrs. Miller. Perhaps the following would 
be advisable: 

1. $ 5,000 for mortgage, payable in cash. 

2. $ 2,000 for bills, etc., payable in cash. 

3. $13,000 for living expenses, payable in monthly 

income, fifteen years certain (3 per cent basis) 
#81X13 = $1053 annually for fifteen years. 

There will also be surplus interest averaging (at I 
per cent) about $80 or $90 a year. This plan would 
enable Mrs. Miller to pay outstanding bills and funeral 
expenses and clear the mortgage, and would furnish her 


11 4 LIFE INSURANCE FUNDAMENTALS 

an income averaging over $1100 a year for fifteen 
years, if we assume surplus interest will continue at 
per cent. If Miller died in the first year, the fifteen- 
year period would end when his child was 17 years old. 
If he died three years from now, the income would 
continue until the child was 20 years old. About 
$2,000 more of the mortgage would then have been paid 
off and $2,000 of the $5,000 mortgage policy could then 
be arranged under the fifteen-year installment certain 
plan, increasing the annual income by $162, plus inter¬ 
est. When the mortgage is paid off, the child will be 
10 years old, and no insurance will be needed for this 
purpose. Eighteen thousand will then be available for 
income, and would furnish installments of about $1,170 
a year for twenty years certain, plus surplus interest. 

After the insurance is in force, the underwriter 
should confer with Miller every year or two regarding 
any advisable modification in the settlement provisions. 
As the need for mortgage protection grew less and his 
child became older, a different settlement might be 
advisable. As soon as possible a settlement should be 
arranged providing at least $25 or $30 a month as long 
as Mrs. Miller lives, with additional limited install¬ 
ment income to increase her income to about $100 a 
month until the child is 18 or 20 years old. 

Term insurance is not to be sold with the idea that it 
is a satisfactory substitute for permanent insurance. 
But, in such a situation as this, it is often advisable 
as the introduction to a permanent plan. Without 
it, Miller could probably not afford over $10,000 or 
$12 ,000 of insurance. The plan suggested above will, in 
case of Miller’s early death, free Mrs. Miller from debt, 


A THRIFTY FAMILY ii 5 

give her the home paid for and provide about $100 a 
month until her child is through school or even college; 
that is, if Miller should die within ten years—before 
the child is 12 years old. In order to provide similar 
protection, if he should die after the child is 12 years 
old— i. e ., after the expiration of the term insurance 
period and to assure permanent provision for his wife, 
Miller must carry out the plan to convert to whole 
life or long-term endowment within seven years (in 
some companies within ten years). 

Good service to Miller will require very careful 
handling of his term insurance. As has already been 
mentioned, the underwriter should, first of all, arrange 
the $19,000 of term insurance in small policies. A 
$2,000 policy should be marked “to provide cash for 
immediate expenses.” Another $2,000 and a $3,000 
policy, or two $2,000 policies and one for $1,000, should 
be marked “to pay the mortgage.” The others should 
be marked “for income,” and the income settlement 
should be arranged without delay. The agent should 
have a term-conversion file, and a card for each of Mil¬ 
ler's term policies should be prepared and filed in such 
a way that it will automatically come to the agent's 
attention at a proper interval before the conversion 
date previously selected. The permanent plan should 
be throughly sold to Miller at the outset , so that he will 
always think of the term insurance in its true light— 
as initial term insurance . 

If both the agent and Miller live to the ninth year, 
the agent should endeavor to complete the original plan 
of at least $31,000 to furnish an income sufficient to 
provide for Mrs. Miller and the child until the child's 


n6 LIFE INSURANCE FUNDAMENTALS 


education is complete, and to provide a reasonable 
monthly life income for Mrs. Miller. 

Term insurance—even as a means of initiating a 
program of permanent insurance—would probably not 
have been advisable for John Brown. 

FOR IMMEDIATE ACTION 

The beginner will probably find it advisable to sell 
first #1,000 or #2,000 to pay final expenses and #5,000 
to cover the mortgage. With #6,000 or #7,000 placed 
for these purposes, he may then take up with Miller a 
more extended program, to be added at once or to be 
adopted gradually. 

If it seems doubtful that Miller will adopt so large 
a program as the one suggested, it would be better to 
place as much insurance as he can afford to carry on 
a life or endowment plan. 



CHAPTER VIII 

PETER DALE—AN AVERAGE CASE 


T HE following example is typical of many cases seen 
by the life insurance agent every day, in that 
only a small amount of information is available. Yet, 
even these few facts are sufficient to suggest very im¬ 
portant needs—perhaps the most important ones in 
this kind of a situation. 

Picture—Peter Dale, 35 years old, married; has a 
son 10 years old and a daughter 7. Is head of a depart¬ 
ment in a large store—earns $3,000 a year—occupies 
a small house which he inherited from his mother— 
has saved only about $500 in Liberty Bonds—carries 
$1,000 of life insurance. 

Since the information is quite limited, there is no item 
which suggests any need in connection with a plan or 
interest of which we may assume Dale may already be 
thinking particularly. 

Needs 

However, it is easy to see the following needs in this 
case: 

1. Cash, for final expenses—accumulated bills for 
groceries, light and gas, telephone, household and other 
current expenses for two or three months, doctors’ 
bills and funeral expenses and, perhaps, a cemetery lot; 
also for emergencies. 

2. Money for living expenses for his wife and children 




118 LIFE INSURANCE FUNDAMENTALS 

for as long a period as he can afford, especially while 
the children are young. 

3. Both children should receive a high-school educa¬ 
tion. Perhaps he will want them to go to college or 
take a course in a business or vocational school. 

4. Dale has not been thrifty. He needs a system 
of compulsory saving. Probably he would not have 
saved what he has, if it had not been for the campaign 
for Liberty Bonds. 

5. His prospects for largely increased earnings do 
not seem to be particularly good. He should plan to 
accumulate an old-age fund. 

6. There is a possibility of his becoming totally and 
permanently disabled and he may well provide against 
this contingency. 

HOW MUCH CAN DALE SAVE? 

The following United States Treasury budget for a 
family with an income of $3,000 a year was shown on 
page 108, but it is reproduced here for convenience. 


£3,000 a Year—£250 a Month 



Number in 

the Family 


Two 

Three 

Four 

Five 

Savings. 

$ 65 

$53 

$ 40 

£ 3 ° 

Taxes (federal income). 

S 

4 

3 

2 

Rent. 

30 

30 

35 

35 

Food. 

40 

48 

56 

64 

Clothing. 

30 

33 

36 

39 

Housekeeping expenses. 

25 

30 

32 

32 

Church, Charities. 

19 

17 

16 

16 

Health, Recreation, Education. 

18 

18 

16 

16 

Personal, Miscellaneous . 

18 

1 7 

16 

16 

Total. 

$ 2$0 

£250 

£250 

£250 




























I 


AN AVERAGE CASE 119 

Examining the column for a family of four, we see 
that if Dale followed this budget he would save $40 
a month or #480 a year. It will be all the easier for 
him to do this, since he owns his home and the cost of 
his rent will be only the expenses for taxes, fire insur¬ 
ance, and upkeep. 

No doubt, in view of his failure to accumulate much 
money, it would be advisable for Dale to put all he 
can save into life insurance. This plan would give 
him a voluntary-compulsory system of saving regu¬ 
larly. It would have the double advantage of guaran¬ 
teeing protection for his family in case of his premature 
death, and also of guaranteeing that when it came time 
for him to retire from business, or at least to decrease 
his activities, he would have the money he had saved. 
Investment of his savings in life insurance will furnish 
the safety which he requires. As his margin of savings 
is not very large, safety is a more important considera¬ 
tion than profit. Life insurance will afford an increase 
in his funds commensurate with a high degree of 
safety, while furnishing the protection he needs for 
his family. 

Perhaps Dale will not be willing to put aside $480 
a year; yet he should do so. If he saved this amount, 
he might object to investing all of it, or even most of 
it, in life insurance. However, the amount of life 
insurance which an annual premium of #480 would 
carry (about $18,000 or $19,000 on the ordinary life 
basis, participating) would be none too great to pay 
for his family’s living expenses, if he should die before 
his children are grown. At 5 per cent, $19,000 would 
yield an income of only $950 a year. 


i2o LIFE INSURANCE FUNDAMENTALS 


SOME RECOMMENDATIONS. 

Suppose that Dale would invest $400 a year in life 
insurance and deposit #80 in the savings bank for an 
emergency fund. What recommendations should we 
make? 

(1) The #500 Liberty Bond and his present life 
insurance of #1,000 should be used to provide cash at 
death to pay bills and funeral expenses. 

(2) Four hundred dollars would carry #15,000 or 
#16,000 of participating ordinary life insurance—say 
#16,000—and about #13,500 on the thirty-payment 
life plan or endowment maturing at age 70; and this 
insurance should be used to provide for the family’s 
monthly expenses. Nonparticipating rates would, of 
course, be less for a certain number of years. Contin¬ 
uous premium endowment maturing at 75 might be 
substituted for the ordinary life policy, the difference in 
premium being very slight. It is quite possible that Dale 
could be more easily interested in an endowment matur¬ 
ing at age 65. A participating 3 per cent premium of 
#400 would pay for nearly #12,000 of insurance on this 
plan. The old age provision would probably make a 
strong appeal. Yet, if he will invest #400 in endowment 
maturing at 75 or in ordinary life, this would probably 
be better for his family and, therefore, in the main, 
better for him. 

(3) The insurance is not sufficient to furnish an ad¬ 
equate life income to Mrs. Dale, either on the interest 
plan or the continuous installment plan. At 

the interest on #16,000 would be about #720 a year. 
Assuming Mrs. Dale to be between 30 and 35 years 



AN AVERAGE CASE 121 

old, if Dale died within the next few years, each $1,000 
would provide, on the continuous installment plan, 
a guaranteed income of about $45 a year for twenty 
years certain and for life, or about the same as the in¬ 
terest plan. But there would be surplus interest, 
starting at about $10 and gradually declining, through¬ 
out nineteen years, averaging perhaps about $5 a year 
per $1,000 of insurance. Beginning at about $880 and 
decreasing a few dollars annually to about $720 at the 
end of twenty years, $16,000 would provide an average 
of about $800 a year for twenty years certain. This 
average is on an assumed surplus-interest basis of 
per cent. The guaranteed annual income thereafter 
would be about $720. Since Mrs. Dale is a young 
woman, the interest plan would be recommended if 
the insurance were somewhat larger, with the privilege 
of changing to the continuous installments after age 
45 or 50. The difference of $160 year in the beginning 
between the interest income and the installment income 
might be a very important consideration, especially 
as there are two children. Yet neither of these plans 
seems to meet the situation. Even $880, the probable 
initial income on the installment plan, is not large 
enough. 

(4) The children are young, the boy 10 years old and 
the girl 7. If possible, the boy should be free to pursue 
his education at least until he is 18 or 20, and the girl 
until she is 20 or 22. If Dale should die the first year, 
the boy should have protection for about ten years 
and the girl for about fifteen years. 

(5) With these facts in mind, let us see if we can 
work out the income from $16,000 in such a way as 


122 LIFE INSURANCE FUNDAMENTALS 

to meet the requirements of the case, by arranging 
a maximum installment during ten years with a smaller 
income until the end of fifteen years, followed by a 
still smaller income to continue as long as the wife 
lives. 

SUGGESTED PLAN OF SETTLEMENT 

Annual 

Income 

$2,000 to be paid on limited installment plan, 


ten years . $ 226 

$4,000 to be paid on limited installment plan, 

fifteen years . 324 

$10,000 to be paid on continuous installment 

plan, twenty years certain, about. 450 

Total guaranteed annual income for 10 

years . $1,000 

Monthly payment. $83.33 


If the surplus interest rate is i }4 per cent there will 
be an additional income of about $170 the first year, 
the surplus interest gradually decreasing. The total 
first year’s income would be about $1,170, and there 
w T ould be a gradual reduction from year to year for 
ten years. 

Assuming death to occur in the first year of insurance, 
at the end of ten years the boy will be twenty years 
old, through high school, and earning his own living. 
The guaranteed income to the mother will be reduced 
in the eleventh year from $1,000 to $774 ($1,000- 
$226), or $64.50 a month. The surplus interest on 
the $2,000 will cease and the interest on the balance 
will be materially reduced. The daughter will then 








AN AVERAGE CASE 123 

be 17 years old, almost through high school. Five 
years later, at the end of fifteen years from the time 
of Dale’s death, the daughter will be 22 years old, 
her high-school education completed and the mother’s 
guaranteed income will be decreased from $774 to $450 
($774-^324), and this will be paid as long as she lives, 
but with no surplus interest after the installment- 
certain period has expired. It will be at least enough 
to pay Mrs. Dale’s board. 

(6) It is quite possible that Dale may live to, say, 
age 65* thirty years longer—at which time it might be 
necessary for him to retire, or, at least, to do less work. 

What would this insurance do for him at that time? 
The cash value per $1,000 of ordinary life (either 3 
per cent or 3^ per cent reserve) would be over $500 
or more than $8,000 for the entire $16,000. This sum 
he could withdraw in whole or in part, if he then needed 
the money more than the insurance. 

If he takes thirty-payment life, the policies will be 
paid up at 65 and the cash values of $13,000 insurance 
will then amount to about $9,760. 

The endowment at 65, say $12,000, would pay 
$12,000 at maturity—age 65. 

On the accelerative plan the ordinary life (partici¬ 
pating) may be matured as an endowment, comparing 
quite favorably, as to the combination of net cost and 
maturity with the long endowment policies; but, of 
course, no maturity date can be guaranteed at the 
outset, as is the case with endowment policies. 

(7) Suppose that Dale should become totally and, 
presumably, permanently disabled: (a) He would have 
no more premiums to pay, no matter how long he con- 


124 LIFE INSURANCE FUNDAMENTALS 

tinued to be totally disabled. ( b ) In addition, under 
some contracts he would receive a life income of $160 
a month (i per cent a month basis) as long as he lived, 
assuming that the $1,000 he already has does not 
contain the disability provision. At his death the 
original insurance would be paid to his beneficiaries 
as he might have directed. 

If long endowment were used instead of ordinary 
life, the disability income would, in some companies, 
be paid only to the maturity of the endowment, which 
would then be paid in full to Dale. Or, Dale could 
have the company hold the proceeds and pay him an 
income as long as he lived, with certain beneficial 
interests to his family. 

Nonparticipating premiums are, of course, less for 
a certain number of years and 3^2 per cent values are 
less than 3 per cent values quoted on the life policies. 
Endowments mature for their face value at a given 
time on either interest basis. 


CHAPTER IX 

A YOUNG CHEMIST, WHO HAS NO DEPENDENTS 

T HE following interesting and typical case of a 
young man without dependents was found in 
the Gold Book of the Eastern Underwriter of September, 
1921. Just such young men are being solicited, par¬ 
ticularly by the younger agents, all over the country 
every day. 

Picture—A young man 22 years of age—out of 
college one year and now working as assistant chemist 
in a steel mill, has no dependents, parents well to do, 
but not wealthy, has not saved anything since leaving 
college, although his salary has been sufficient for him 
to save at least $2.5 a month. Appreciates the value 
of insurance for those who have dependents, but can¬ 
not see his own need for it. 

Following our practice of seeking first some present 
interest of the prospect which may suggest a way in 
which he may most readily comprehend that life in¬ 
surance may be useful to him, let us see what responsi¬ 
bilities and interests this young man has. He has no 
dependents to care for. He is not married. His par¬ 
ents are well to do. Perhaps in our interview with him 
we may discover that he is engaged to be married, 
although he is only 22 years old. So far as we know 
he has no debts. He has never saved any money, so 
he has not been greatly interested in saving; yet it 



126 LIFE INSURANCE FUNDAMENTALS 

is barely possible that he may think of it now. He 
believes in insurance for persons with dependents. 
He can afford to set aside $25 a month in savings. 
Perhaps we can persuade him to use life insurance as 
his saving medium, for we can make the double appeal 
through savings and life insurance. 

He is assistant chemist in a steel mill. The “pic¬ 
ture” tells us nothing about his character, whether he 
is industrious and ambitious or not. Yet it is fair to 
assume that the one responsibility which this young man 
has and in which he feels a keen interest, is his business 
progress. No doubt he is anxious to get ahead, to make 
good in the eyes of his employers, so as to secure pro¬ 
motion. This he feels as a need and he will probably 
be interested in anything that will help him to win the 
approval of his employer and thus improve his business 
prosperity. 

Can life insurance help him in this direction? Re¬ 
cently a student at Carnegie Tech told the author 
the following story: “An inspector of a surety bond 
house was making a survey of the personnel in the finan¬ 
cial department of a very large concern. Among other 
steps, he took the time to go over the “history” cards 
of all these employees, in order to learn what their 
previous experience had been and to note any items of 
information which might give some insight into each 
employee’s character. Every now and then the in¬ 
spector would throw aside a card. After he had thus 
separated a number of the cards from the file, the 
representative of the concern (who was also the student 
who told this story) asked why these cards were being 
laid aside. “Because,” said the inspector, “those men 


YOUNG CHEMIST—NO DEPENDENTS 127 

carry life insurance. Our experience has taught us 
that, as a rule, a group of men whose lives are insured 
is a pretty good one. They certainly have a sense of 
responsibility, and are doing something to guarantee 
their obligations. They are saving regularly. Usually 
they are less extravagant in their habits than a group of 
men who don’t carry insurance, because they are saving. 
In making a detailed inspection we shall not go any 
further with your employees who carry life insurance. 
Moreover, they have been inspected by the life-insur¬ 
ance companies; and life-insurance companies are care¬ 
ful as to whom they insure.” 

APPROVAL OF EMPLOYERS 

It is obvious that life insurance will give this young 
assistant chemist an advantage in the eyes of his em¬ 
ployer. Ask any employer what he thinks of the 
young unmarried man who carries life insurance, and 
you will find that he has a better opinion of such a 
young man and considers him a more desirable employee 
because of his life insurance. 

Also an employer likes to know that his employees 
are laying aside money for a rainy day and for the fu¬ 
ture. Almost every firm of any importance is called on 
from time to time to assist an employee who is finan¬ 
cially embarrassed because of some emergency, such as 
a long illness or an operation, or the necessity of helping 
some member of his family. The employer knows that 
employees who are accumulating savings accounts are 
not likely to become a charge on the company in such 
emergencies, that they are preparing to stand on their 
own feet when things get wobbly, instead of leaning 


128 LIFE INSURANCE FUNDAMENTALS 


on their employers for support. Then the employer is 
all too familiar with the case of the employee who dies 
and leaves a widow and children unprovided for. 
Many firms feel it their duty to give a little help in 
such cases; but as a rule what seems a generous con¬ 
tribution on their part is not really enough to go far, 
and they know it. Sometimes they pay the funeral 
expenses and other pressing bills. An increasing num¬ 
ber of employers are using group insurance to protect 
themselves, as well as the families of employees, in 
such cases. They would feel better satisfied with an 
employee who, they knew, was preparing himself for 
financial emergencies by saving his money and carrying 
life insurance. If the employee is young and unmarried, 
the employer is none the less glad to see him have his 
life insured. He knows that the young man will prob¬ 
ably marry soon and that it will be harder for him to 
learn to save after he is married, because of his increased 
expenses, unless he happens to have an unusually 
thrifty wife. Also the employer knows that the young 
man who is careful and fore sighted in his personal affairs 
is more likely to be careful and foresighted in the affairs 
of the firm . Personal thrift induces habits of thought 
and conduct which may affect favorably all a man’s 
actions, both in his own affairs and in those which con¬ 
cern others. 

Since an employer estimates a young man’s value 
to the firm partially upon his habits of thrift and fore¬ 
sight, then it should be obvious to the young chemist 
that saving money and carrying life insurance will 
make him a better man in all those relations of life in 
which self-control, care, and foresight are required. 


YOUNG CHEMIST—NO DEPENDENTS 129 

The spendthrift exercises little or no self-control in 
one of the fundamental things of life. Of course, 
money in itself is nothing; but the right use of it means 
much. The young man who saves is, through self- 
control, building for himself a position in which he may 
later control many different things—a business, better 
education, enjoyment of the greater values of life, 
even the opportunity to be charitable and generous 
where gifts will do the most good. Saving develops 
careful habits, because saving requires careful spending. 
The spendthrift is likely to be careless in many things, 
for he has developed a habit of carelessness in one of 
the fundamentals of life. 

LIFE INSURANCE PROVIDES AN ESTATE 

This young man has no estate. Life insurance is 
an estate, purchased on the long-time installment plan 
with a guaranty that unpaid installments will be can¬ 
celed at death. It is a remarkable thing that, without 
property, the young chemist may at once, by signing 
an application (to be approved by the company), and 
making the first installment payment, become the owner 
of an estate which under certain conditions may do 
as much for him as an estate of equal amount and com¬ 
posed of first-class real estate, stocks, and bonds, which 
a wealthy father might have left him. Every man 
needs an estate. The man who has no estate is in the 
same situation as the savage, in one sense,— i. e ., he is 
living from day to day. Even though he earns thou¬ 
sands of dollars every year, if he has accumulated no 
estate he is, in a very real sense, living from hand to 
mouth; and in case of death, total disability, or old 


i 3 o LIFE INSURANCE FUNDAMENTALS 

age, will be no better off, practically speaking, than the 
improvident savage in similar situations. 

Life insurance makes it possible for the young man 
who has not yet lived long enough to build an estate 
through accumulated savings to possess an estate which 
in certain important contingencies will accomplish just 
as much as an estate of equal amount accumulated by 
a man 60 years old over a period of thirty years of frugal 
living and careful saving. 

Thrift develops character-habits which appeal to 
substantial people. The young man who saves always 
commands the respect of superior people. Those who 
would condemn the thrifty young man are almost sure 
to be persons whose opinion in most matters would 
not be worth while and whose recommendations 
would not carry much weight. Good business men, 
bankers, rich men, would almost unanimously urge the 
young man to save; their opinion is worth while. The 
spendthrift, on the other hand, does not inspire respect 
in the minds of substantial business men. They do 
not expect that the spendthrift will have self-control, 
will be careful and foresighted. 

EMERGENCIES AND OPPORTUNITIES 

There are other practical reasons why the young 
chemist should take advantage of the opportunity to 
save money on the life insurance plan. The average 
young man is not able to meet emergency demands 
which come to everyone sooner or later. He might have 
a long illness or some other emergency might arise in 
which he would require more money than he is earning 
from week to week or month to month. An illness 


YOUNG CHEMIST—NO DEPENDENTS 131 

might not only entail an accumulation of expenses, but 
it might result in a loss of income. If he has no surplus 
funds he may be obliged to go in debt. 

Again, he should be prepared to take advantage of a 
good business opportunity. The man who has funds 
or security at such a time has a chance to start in busi¬ 
ness for himself or to make a business investment. A 
life insurance policy has cash and loan values. More¬ 
over, the policy has collateral value and occasion might 
arise when the assignment of the policy to a creditor or 
to some one willing to employ him in some undertaking 
might secure him an unusual opportunity. 

GRATITUDE TO HIS PARENTS 

The young chemist’s parents have probably done 
much for him. No doubt they paid for his education 
and have assisted him in many other ways. Even 
though they have no need of his help, he would like to 
feel that, if he died, his current debts and funeral ex¬ 
penses would be paid out of his own estate. Besides, 
he would take great satisfaction in the thought that, 
in event of his death, he would leave some estate to 
his parents or, perhaps, directly to his mother. She 
would always be very happy to think that her boy had 
thought of her and wanted to leave her all he could. 

HE WILL PROBABLY MARRY 

He realizes, too, that he will probably marry. The 
average young man marries at 27 or 28 years of age. 
The chances are that he will be married in only a few 
years, that he will become a father and have all the 


132 LIFE INSURANCE FUNDAMENTALS 

obligations of a married man. It is wise to begin to 
provide against these almost certain responsibilities. 

BUYING NOW MEANS SAVING 

He will save money by insuring now instead of wait¬ 
ing until he is married. A young man insuring at 25 
years of age will at the end of a given number of years 
have an advantage over the man who waits until he is 
30 or 40. For example, a young man who is 25 years old 
buys a twenty-payment life policy of $10,000 at a non¬ 
participating rate of $225.30. At the age of 30 he buys 
another twenty-payment life policy for $10,000 at the 
rate of $247.10. At 50, when the second policy becomes 
paid up and has a cash value of $5,084.90 (3^ per cent), 
the policy which he bought at age 25 has the same cash 
value, although the total premiums on the age-25 policy 
amounted to $4,506 against $4,942 on the age-30 policy. 
Moreover, he has had insurance protection for $10,000 
five years longer under the first policy than under the 
second one. 

Again, if the young chemist thinks it would be better 
to wait until he is married before insuring, he should 
remember that even young men may become unin- 
surable. If he should wait five years and then be 
rejected for insurance, he would never cease to regret 
his procrastination, which had deprived his wife and 
children of protection. Prudence and foresight de¬ 
mand immediate action. 

Needs 

1. Habit of saving and thrift. 

2. Approval of employer and substantial people. 


YOUNG CHEMIST—NO DEPENDENTS 133 

3. An emergency fund. 

4. Capital for business opportunities. 

5. An estate for his own future and the future of 
dependents. 

6. To show gratitude to his parents. 

7. Payment of his final expenses. 

8. To save money by buying now rather than waiting. 

The prospect can save #300 a year. We might 
recommend that he select an endowment maturing 
about sixty, or a twenty- or thirty-payment life policy. 
The ordinary life is not nearly so attractive to the aver¬ 
age young man situated as he is. The annual deposit 
on the twenty-payment life or the thirty-five-year 
endowment at age 22 would be between $26 and $27 
per $1,000, while the thirty-payment life and the forty- 
year endowment rate would be about $23 or $24 (3 per 
cent participating policies); nonparticipating rates, $5 
or $6 less at the start. He could carry $10,000 or 
$11,000 twenty-payment life or thirty-five-year endow¬ 
ment and $12,000 or $13,000 on the thirty-payment life 
or the forty-year endowment plan. Perhaps it would 
be wise to recommend a forty-year endowment or an 
endowment at sixty, with the idea of proposing life 
insurance as one of his chief investment plans. Yet 
he may prefer a limited-payment plan, which usually 
makes a strong appeal to young men. 

We should finally (perhaps after placing a certain 
amount of insurance) work out a more extensive pro¬ 
gram, emphasizing the value of life insurance as a per¬ 
manent investment medium. For instance, it would be 
a splendid idea if the young chemist would now make 


1 


/ 


i34 LIFE INSURANCE FUNDAMENTALS 

up his mind that, when he is 60 years old, he will have 
$50,000 absolutely guaranteed, and gradually increase 
his savings and invest from year to year in additional 
policies maturing at age sixty. Here would be a worth¬ 
while investment program, definite, safe, and unquestion¬ 
ably more certain of accomplishment than any other 
he would ever adopt. If he begins it now, in a few 
years he will have $50,000 of life insurance protection 
and be on the sure road to a snug fortune of $50,000 in 
cash. 


PART III 


THE PRINCIPLES OF LIFE INSURANCE 








I 


♦ 

II 



CHAPTER X 


MORTALITY TABLE—NET NATURAL PREMIUM 
DISCOUNTING AT A RATE OF INTEREST 

I NSURANCE may be defined simply as a co-operative 
system by which a large group of persons share one 
another’s losses. If a house which is not insured against 
fire burns, the financial loss must be borne entirely by 
the owner; but if it is fully insured, the company re¬ 
imburses the owner for his actual loss. In fact, how¬ 
ever, the loss is shared by all the policyholders in the 
company. The annual premium paid by each policy¬ 
holder is largely for the purpose of paying his pro¬ 
portionate share of the company’s total estimated 
fire losses for the year, his proportion of the total being 
determined by the amount of his own insurance. When 
a house burns, all the policyholders join (through the 
premiums they have already paid) in reimbursing the 
owner for his loss, he himself participating in the re¬ 
imbursement through the premiums he has paid. 

The same principle applies in other lines of insurance, 
including life insurance. Suppose that proven statis¬ 
tics showed that, on the average, from year to year, 
1,000 people out of 100,000 living at age forty-one, died 
during the year, i. e ., before attaining age forty-two. 
If each one of the group was insured for $1,000, then, 
on the basis of our statistics, we should expect to pay 
out in death claims during the year 1,000 X $1,000, or a 
total of $1,000,000. If each one of the 100,000 persons 


137 


i 3 8 LIFE INSURANCE FUNDAMENTALS 

in the group, at age forty-one, paid a premium of $J0 
at the beginning of the year (assuming that the com¬ 
pany had no operating expenses to pay and earned no 
interest), the company would have on hand a fund of 
100,000 X$io, or $1,000,000, with which to pay the 
$1,000,000 of death claims. In other words, each per¬ 
son, including those who died, would at the beginning 
of the year have paid his share, one one-hundred- 
thousandth ($io) of the total estimated, or expected, 
death claims of $i, 000,000. 

This principle of co-operation, or sharing of losses, 
being established as the basis upon which life and other 
insurances are founded, the question naturally arises, 
have we any dependable statistics regarding the rate 
at which human beings die on which to base our cal¬ 
culations of the amount which each member of the 
group should pay, in order that the company may al¬ 
ways have enough money with which to meet its death 
claims? In the above illustration, for instance, it was 
estimated that, on the average, 1,000 out of 100,000 
persons would die during the year, making the individ¬ 
ual share of death claims, to be paid by each, $10. 
Suppose that this amount had been collected from each 
person, insuring him for $1,000 for one year, but that, 
instead of 1,000 deaths, there were 1,100 during the 
year; there would be on hand only $1,000,000 with 
which to meet obligations of $1,100,000. The company 
would be insolvent, and some beneficiaries would be 
deprived of their insurance money. 

It is absolutely essential, therefore, that statistics 
which are to be used as a basis of determining how much 
money must be collected in premiums shall be as ac- 


MORTALITY TABLES 139 

curate as possible, and dependable for estimating con¬ 
servatively the number of persons of a group who will 
die from year to year on the average. 

Fortunately, the “old-line” life-insurance companies 
are using a table of mortality statistics which has been 
found by many years’ experience to be safe. Many 
years ago our American life-insurance companies used 
death statistics, compiled in Europe, chiefly in England. 
These tables were safe, and some of them are still widely 
used; but about i860, Mr. Sheppard Homans, actuary 
of the Mutual Life Insurance Company of New York, 
compiled a table of mortality statistics based largely 
on the history of American lives which had been insured 
in his company. This table was named the American 
Experience Table of Mortality, and is to-day in almost 
universal use by the American life-insurance companies. 
Indeed, it is prescribed in the laws of most states. 

Can past mortality experience be used successfully 
to estimate future death rates approximately? Yes, if 
the data compiled are correct and if the number of lives 
involved is sufficiently large. Obviously, the data must 
be correct, for any conclusion that is drawn from false 
premises will be wrong. Dependable mortality statis¬ 
tics must first of all be based on a correct record of the 
longevity of the individuals who were included in the 
statistics. 

It may not be quite so obvious why it is necessary to 
have a large number of cases in order to predict events 
of the future from happenings of the past. Many events 
which do not seem to recur with any degree of regularity, 
but rather appear to be irregular and entirely due to 
chance, are, nevertheless, regular to this extent, viz.. 


140 LIFE INSURANCE FUNDAMENTALS 

American Experience Table of Mortality 


Age 

Number 

Living 

Deaths 

Each 

Year 

Death- 

rate 

Per 1,000 

Expec¬ 
tation 
of Life 

Age 

Number 

Living 

— 

Deaths 

Each 

Year 

Death- 

rate 

Per 1,000 

Expec¬ 
tation 
of Life 

10 

100,000 

749 

7.49 

48.72 

53 

66,797 

1,091 

16.33 

18.79 

11 

99,251 

746 

7.52 

48.08 

54 

65,706 

1,143 

17.40 

18.09 

12 

98,505 

743 

7.54 

47.45 

55 

64,563 

1,199 

18.57 

17.40 

13 

97,762 

740 

7.57 

46.80 

56 

63,364 

1,260 

19.88 

16.72 

14 

97,022 

737 

7.60 

46.16 

57 

62,104 

1,325 

21.33 

16.05 

15 

96,285 

735 

7.63 

45.50 

58 

60,779 

1,394 

22.94 

15.39 

16 

95,550 

732 

7.66 

44.85 

59 

59,385 

1,468 

24.72 

14.74 

17 

94,818 

729 

7.69 

44.19 

60 

57,917 

1,546 

26.69 

14.10 

18 

94,089 

727 

7.73 

43.53 

61 

56,371 

1,628 

28.88 

13.47 

19 

93,362 

725 

7.76 

42.87 

62 

54,743 

1,713 

31.29 

12.86 

20 

92,637 

723 

7.80 

42.20 

63 

53,030 

1,800 

33.94 

12.26 

21 

91,914 

722 

7.85 

41.53 

64 

51,230 

1,889 

36.87 

11.67 

22 

91,192 

721 

7.91 

40.85 

65 

49,341 

1,980 

40.13 

11.10 

23 

90,471 

720 

7.96 

40.17 

66 

47,361 

2,070 

43.71 

10.54 

24 

89,751 

719 

8.01 

39.49 

67 

45,291 

2,158 

47.65 

10.00 

25 

89,032 

718 

8.06 

38.81 

68 

43,133 

2,243 

52.00 

9.47 

26 

88,314 

718 

8.13 

38.12 

69 

40,890 

2,321 

56.76 

8.97 

27 

87,596 

718 

8.20 

37.43 

70 

38,569 

2,391 

61.99 

8.48 

28 

86,878 

718 

8.26 

36.73 

71 

36,178 

2,448 

67.66 

8.00 

29 

86,160 

719 

8.34 

36.03 

72 

33,730 

2,487 

73.73 

7.55 

30 

85,441 

720 

8.43 

35.33 

73 

31,243 

2,505 

80.18 

7.11 

31 

84,721 

721 

8.51 

34.63 

74 

28,738 

2,501 

87.03 

6.68 

32 

84,000 

723 

8.61 

33.92 

75 

26,237 

2,476 

94.37 

6.27 

33 

83,277 

726 

8.72 

33.21 

76 

23,761 

2,431 

102.31 

5.88 

34 

82,551 

729 

8.83 

32.50 

77 

21,330 

2,369 

111.06 

5.49 

35 

81,822 

732 

8.95 

31.78 

78 

18,961 

2,291 

120.83 

5.11 

36 

81,090 

737 

9.09 

31.07 

79 

16,670 

2,196 

131.73 

4.74 

37 

80,353 

742 

9.23 

30.35 

80 

14,474 

2,091 

144.47 

4.39 

38 

79,611 

749 

9.41 

29.62 

81 

12,383 

1,964 

158.60 

4.05 

39 

78,862 

756 

9.59 

28.90 

82 

10,419 

1,816 

174.30 

3.71 

40 

78,106 

765 

9.79 

28.18 

83 

8,603 

1,648 

191.56 

3.39 

41 

77,341 

774 

10.01 

27.45 

84 

6,955 

1,470 

211.36 

3.08 

42 

76,567 

785 

10.25 

26.72 

85 

5,485 

1,292 

235.55 

2.77 

43 

75,782 

797 

10.52 

26.00 

86 

4,193 

1,114 

265.68 

2.47 

44 

74,985 

812 

10.83 

25.27 

87 

3,079 

933 

303.02 

2.18 

45 

74,173 

828 

11.16 

24.54 

88 

2,146 

744 

346.69 

1.91 

46 

73,345 

848 

11.56 

23.81 

89 

1,402 

555 

395.86 

1.66 

47 

72,497 

870 

12.00 

23.08 

90 

847 

385 

454.54 

1.42 

48 

71,627 

896 

12.51 

22.36 

91 

462 

246 

532.47 

1.19 

49 

70,731 

927 

13.11 

21.63 

92 

216 

137 

634.26 

.98 

50 

69,804 

962 

13.78 

20.91 

93 

79 

58 

734.18 

.80 

51 

68,842 

1,001 

14.54 

20.20 

94 

21 

18 

857.14 

.64 

52 

67,841 

1,044 

15.39 

19.49 

95 

3 

3 

1,000.00 

.50 


that in an extended series of a large number of recur¬ 
rences there is an average rate which will always, or at 
least generally, hold good. For example, there is 




















MORTALITY TABLES 141 

nothing more irregular in its results than a game of 
chance—the tossing of a coin, the play of a card, the 
roll of dice, the turn of the roulette wheel. It is quite 
impossible to predict that a coin tossed into the air will 
fall heads up, or that the ace of spades will be drawn 
from the pack of cards. It is impossible to predict, 
for example, that a coin tossed 100 times will fall 50 
times heads up and 50 times tails. It might fall 60 
times heads and 40 times tails, or 45 heads and 55 tails, 
etc. If we stake money on a single toss of a coin, or 
on a small number of trials, we are simply gambling. 
But we may with safety predict, and it has been demon¬ 
strated that, if the coin is tossed a very great number of 
times, it will fall heads up and tails up approximately 
an equal number of times, and this prediction may be 
successfully made over and over again; for example, 
we could safely predict that, in 100,000 trials, the coin 
would fall about 50,000 times heads up and 50,000 times 
tails up. 

It is likewise impossible to predict when an individual 
will die, or, to put it another way, how long he will live. 
Common sense tells us that young men as a class have 
longer to live than old men. But we could not say with 
certainty that a particular young man would outlive a 
certain old man; we know that the young man might 
die first. We could not predict that any given number 
of 100 men 50 years old would die before reaching 
51, but we find that we can forecast with practical 
accuracy the approximate number of deaths that will 
occur within the year in a group of many thousands of 
men 50 years old. Experience over a long period of 
years has demonstrated that, on the average, people 


i 4 2 LIFE INSURANCE FUNDAMENTALS 

of a given age will die at a certain rate. But these 
averages, for various ages, will not necessarily hold 
good, if the number of lives involved is small. The 
average death rates for large groups of persons serve 
as a safe basis for predicting mortality. 

One of the first things we notice in the American 
Experience Table of Mortality is that it involves a very 
large number of lives, starting as it does with 100,000 
at age 10. Having gathered his data with reasonable 
care and having included in his calculations a very large 
number of lives, Mr. Homans was justified in expecting 
that his mortality table would be found dependable. 
Time has proved that it is conservative and safe. 

Examining our table, we find that at age 10 there are 
749 deaths out of 100,000 persons living at the beginning 
of the year, the rate per 1,000 being 7.49. This leaves 
99,251 living at age 11, of whom 746 die; this is at the 
rate of 7.52 per 1,000, showing that the death rate is a 
little higher at age 11 than at age 10. At age 20, there 
are 92,637 still living, of whom 723 die during the year, 
a rate of 7.80 per 1,000. At 30, 720 out of 85,441 die, 
the rate being 8.43 per 1,000. At 40, 50, 60, 80, and 90, 
the mortality rate per 1,000 rises to 9.79, 13.78, 26.69, 
144.47, and 454.54, respectively. At age 96, the rate 
is 1,000 per 1,000, or as we commonly say 100 per cent; 
for of the three who started in the group of 100,000 at 
age 10 and who are still living at 95, past experience, on 
the basis of the data used in compiling the American 
Table, shows that, on the average, all three will die 
before reaching age 96. 

Using the above table as a basis, it is possible to work 
out the mortality premium to charge for any age. Let 


MORTALITY PREMIUMS 143 

us remember that the mortality premium is the share 
of ‘ ‘expected ” losses which the individual will be called 
upon to pay, as his part in the co-operative system. 

Suppose, for example, that we wanted to insure per¬ 
sons 35 years old for one year only, agreeing to pay 
$1,000 for each death occurring during the year. What 
should each one pay? The problem is simply to find 
what will be the individual share of the death losses 
of the group living at age 35 during one year, each one 
being insured for $1,000. 

According to the table the number of deaths at age 
35 is 732 and the total amount to be paid in death claims 
is 732 X 1,000, or $732,000. In life-insurance calcula¬ 
tions, for convenience, we assume that the death claims 
are all paid at the end of the year, although, in fact, 
they are paid as the deaths occur. Premiums are al¬ 
ways due at the beginning of the year; thus every mem¬ 
ber of the group, including those who die before the end 
of the year, will have paid his share of the death claims. 

The sum of $732,000 will, therefore, theoretically, 
be payable in death claims at the end of the year. How 
much shall we collect as a premium fund at the begin¬ 
ning of the year? If no interest could be earned, it 
would be necessary to collect the entire $732,000 at the 
beginning of the year, deposit it in a safe place until the 
end of the year, and then pay $1,000 to the beneficiary 
of each of the 732 persons deceased. But interest can 
be earned, and the premium fund to be collected can, 
therefore, be less than $732,000 by the amount of 
interest to be earned. 

We must know in advance how much the interest will 
be, so that we may deduct it from the total amount 


i 4 4 LIFE INSURANCE FUNDAMENTALS 

needed at the end of the year and collect on that basis. 
What rate of interest shall we assume we can certainly 
earn during the year? In deciding this question we 
must bear in mind that it is necessary to guarantee that 
our fund at the end of the year will be #73 2,000; our 
company would be insolvent if it assumed it would earn 
6 per cent, collected $732,000 less such interest and 
actually earned only 5 per cent during the year. 

A story has been told of a woman who asked the late 
Henry H. Rogers to invest her money in such a way 
that it would earn 20 per cent. Mr. Rogers is quoted 
as having remarked that he knew of no invesment he 
could make even at 6 per cent which could be guaran¬ 
teed to be permanently safe. 

One of the chief factors in determining rates of in¬ 
terest is safety of principal. The safer the investment, 
the lower the rate of interest the borrower will pay. 
High interest is payment for the risk involved as well 
as for the use of money. When the United States 
borrows money, it pays the lowest rates (2, 3, 4 per 
cent, according to conditions), because money lent to 
the United States is as safe as anything can be. Cities, 
counties, and states borrow at low rates (3, 4, and 4F2 
per cent), because investors are glad to lend their money 
on bonds of such high security. 

But high-grade industrial corporations and reputable 
individuals must, as a rule, pay higher rates, since it is 
not so certain that they will be able to repay the money 
borrowed. Companies and individuals whose credit 
is not first class must pay high rates, because it is un¬ 
certain that they will be able to repay the borrowed 
money in full. 


INTEREST RATES 145 

The life-insurance company must guarantee that, when 
death claims are payable, it will have the funds with 
which to pay. Therefore, if we are to collect at the 
beginning of the year the death claims due at the end 
of the year less an assumed rate of interest, lend the 
funds collected so as to earn the interest, and be abso¬ 
lutely sure we shall receive at the end of the year both 
the money lent and the interest due, it is clear that the 
security must be first class and that the rate of interest 
earned will, therefore, not be very high. 

Life insurance companies assume that they will earn 
a very low rate of interest. The majority use 3^ per 
cent, while a number have adopted 3 per cent; that 
means they guarantee to earn 3 per cent or 3L2 per cent. 
Therefore, in calculating the amount of premiums to 
collect at the beginning of the year, in order to pay 
$732,000 in death claims at the end of the year, the 
companies would collect $732,000 less a discount 
calculated on a 3 per cent, or a 3per cent, interest 
basis. 

Perhaps it may seem strange that companies are not 
willing to guarantee that they will earn more than a 
mere 3 per cent or 3^ per cent, when there are so many 
sound investments that yield 4 per cent, per cent, 
or 5 per cent; for the higher the interest the larger is 
the discount and the smaller the amount of the premium 
fund necessary to pay the death claims. For instance, 
$732,000 discounted at 3 per cent for one year amounts 
to $710,679.61, while the discount value at 5 per cent 
is $697,142.86. In other words, if we can collect 
$710,679.61 and receive interest for one year at 3 per 
cent, we shall have a total of $732,000, while the same 


146 LIFE INSURANCE FUNDAMENTALS 

result could be obtained at 5 per cent interest by 
collecting only $697,142.86, thus making the cost of 
insurance less than it would be, if only 3 per cent 
interest is assumed. 

If life-insurance policies were all of very short 
duration, interest rates higher than 3 per cent or 3^ 
per cent might be adopted in fixing premiums; but some 
policy contracts may be in force seventy or eighty years, 
and most of them run for a considerable length of time. 
Interest rates may be much lower twenty, forty, or 
sixty years from now than they are at present. If 
companies should agree to insure thousands of persons 
on a premium basis which involved a discount at the 
rate of per cent or 5 per cent interest over a long 
period of years and money rates should fall so that the 
companies earned only, say, 4 per cent or 3^ per cent, 
on the average, they would be insolvent. Money rates 
are lower in the United States than they were fifty years 
ago. In normal times they are lower in Europe than 
in the United States. As this country becomes more 
closely settled and more intensively developed, interest 
rates may fall. As long as there are any possibilities 
of a decrease in the average earning power of money, 
it would be dangerous for life-insurance companies to 
assume that they will earn higher rates of interest. 

DISCOUNTING DEATH CLAIMS 

As has already been stated, in a one-year insurance 
the premium fund to he collected at the beginning of 
the year will be the amount of death claims due at the 
end of the year, discounted for one year at the assumed 
rate of interest. 


NET NATURAL PREMIUM H7 

Assuming 3 per cent interest, how shall we, for 
example, discount the death claims of #732,000 payable 
at age 35? We shall divide #732,000 by 1.03 (per cent) 

#710,679.61, which is the total premium fund to be 
collected at the beginning of the year. As there are 
81,822 persons living at the beginning of the year (age 
35 )> it is obvious that the individual share to be paid 
by „f Ch T “ $ 7 io,679.61 +81,822 =#8.6857 =#8.69. 

1 his individual share of the premium fund which at 
3 per cent interest will provide #732,000 at the end of 
the year for payment of death claims is called the 

net premium. ” As the insurance is for a term of one 
year ^only, it is called “one-year-term insurance.” 

1 he net one-year-term premium ” is also commonly 
called the “net natural premium.” 

Net premiums are the amounts collected from individuals 

for accumulating funds with which to pay death claims of 
the group . J 

Following are the natural, or one-year-term, net 
premiums for ages 20 to 95 based on the American 
Table and both 3 per cent and 33^ percent interest. 

1 Seventy-six cents, if discounted by use of factor .970874. 


Table of Net Natural Premiums 

Net Natural Premium to Insure $ 1,000 One Year. Amer. Ex. Table 


Age 

3 Per Cent 

3>£ Per Cent 

20 

$7.58 

$ 7-54 

21 

7-63 

7 - 5.9 

22 

7.68 

7.64 

23 

7-73 

7.69 

24 

7.78 

7-74 

25 

7-83 

7-79 

26 

7.89 

7.86 

27 

7.96 

7.92 

28 

8.02 

7:98 

29 

8.10 

8.06 

30 

8.18 

8.14 

31 

8.26 

8.22 

32 

8.36 

8.32 

33 

8.46 

8.42 

34 

8,57 

8.53 

35 

8.69 

8.64 

36 

8.82 

8.78 

37 

8-97 

8.92 

38 

9.13 

9.09 

39 

9 - 3 i 

9.26 

40 

9-51 

9.46 

4 i 

9.72 

9.67 

42 

9-95 

9.91 

43 

10.21 

10.16 

44 

10.51 

10.46 

45 

10.84 

10.79 

46 

11.23 

11.17 

47 

11.65 

H -59 

48 

12.14 

12.09 

49 

12.72 

12.66 

50 

I 3-38 

I 3 - 3 I 

5 i 

14.12 

14.05 

52 

14.94 

14.87 

53 

15.86 

I 5-78 

54 

16.89 

16.81 

55 

18.03 

17.94 

56 

19.31 

19.21 

57 

20.71 

20.61 


148 


Age 

3 Per Cent 

3>2 Per Cent 

58 

$22.27 

$22.16 

59 

24.00 

23.88 

60 

25.92 

25-79 

61 

28.04 

27.90 

62 

30.38 

30.23 

63 

32.95 

32.80 

64 

35-8o 

35-63 

6.5 

38.96 

38.77 

66 

42.43 

42.23 

67 

46.26 

46.04 - 

68 

50.49 

50.24 

69 

55 -n 

54-84 

70 

60.19 

59-90 

7 i 

65.69 

65.38 

72 

71-59 

71.24 

73 

77.84 

77-47 

74 

84.49 

84.09 

75 

91.62 

91.18 

76 

99-33 

98.85 

77 

107.83 

107.31 

78 

117.31 

116.74 

79 

127.90 

127.28 

80 

140.26 

I 39-58 

81 

153-99 

153-24 

82 

169.22 

168.40 

83 

185.98 

185.08 

84 

205.20 

204.21 

85 

228.69 

227.59 

86 

257-93 

256.70 

87 

294.20 

292.77 

88 

336.59 

334-97 

89 

384.33 

382.48 

90 

44 I- 3 I 

439-17 

91 

516.96 

514.46 

92 

6i579 

612.81 

93 

712.79 

709.35 

94 

832.18 

828.16 

95 

970.87 

966.18 














DISCOUNTING AT RATE OF INTEREST 149 

The student will note in the above tables that the 
3 A per cent net premium rates are lower than the ? -per 
cent rates.. The higher the interest to he deducted from 
death claims, in discounting them, the less the amount 
to be paid by policyholders. To put the same thing in 
another way, the lower the rate of interest (or discount) 
the more money the policyholders must contribute. 

DISCOUNTING AT A RATE OF INTEREST 

The above method of discounting is, as is readily 
seen, different from bank discount. If you should 
borrow £1,000 from the banker for a year and he 
demanded 6 per cent interest in advance, he would 
deduct #60 from £ 1,000 and turn over to you £940 
When your note fell due, you would pay the bank 
£1,000. You would have paid the banker £60 for the 
use of only £940 for one year, or 6.383 per cent; 6 per 
cent interest on £940 for one year is only £56.40 instead 
of £60. If you paid the bank at the end of the year 
the sum borrowed plus 6 per cent interest, the amount 
would be £996.40, and not £1,000. 

Suppose the banker wanted his interest in advance, 
but intended to loan you exactly that sum of money 
which togethe with 6 per cent interest would amount 
to £1,000 at the end of the year. He would divide 
£1,000 by 1.06 (per cent) and hand you £943.40, or 
£3.40 more than you would have received by bank dis¬ 
count. T his method of discounting is technically known 
as discounting at a rate of interest. Life-insurance 
companies use this method in discounting the amounts 
of death claims, for the purpose of determining the sums 
of money to be collected as premiums—-z. e. t they deduct 


150 LIFE INSURANCE FUNDAMENTALS 

the exact amount of interest that will be earned at an 
assumed rate. 


PRESENT VALUE 

The amount obtained by this discount method is the 
present value of the amount discounted. If we dis¬ 
count $1,000 at 3 per cent, for one year, by dividing 
1.03 into $1,000, the result, $970,874-, is the present 
value of $1,000 due one year hence— i. e. y $970,874- 
is the sum which, invested at the present time so that 
it will earn 3 per cent interest, will amount to $1,000 
one year from now. To illustrate simply the utility 
of present values, suppose you wanted to have exactly 
$1,000 in the bank one year from now with which to 
pay a debt of $1,000 due at that time, and that, as the 
bank would allow 3 per cent interest, you wished to 
deposit in the bank at the present time that sum which 
with one year’s interest would amount to $1,000 on the 
desired date. You would find the present value^of 
$1,000 due one year hence by the following simple 
process: $1,000^1.03 =-*$970,874-. Presentvalue is also 
called present worth . 



CHAPTER XI 


THE NET SINGLE PREMIUM—COMPOUND DISCOUNT—FIVE- 

YEAR TERM INSURANCE 

S uppose that a man 35 years old wanted to have 
his life insured for a period, or term, of five years 
on the net natural premium plan. From the table 
(p. 148) of net natural premiums we find that he would 
pay a gradually increasing rate each year, as follows: 


At 

age 35 


it 

“36 . 


it 

“37 . 

.8.97 

it 

“38. 

. 9-13 

it 

“ 39 . 

. 9-31 


What should we say if another person, also 35 years 
old, should ask how much we would charge if he paid for 
the five years' insurance in a single sum in advance? 
How would we compute a premium on this basis— 
called a single premium? 

In preparing to calculate a life-insurance premium 
for any term of years, no matter whether it is to be an 
annual premium or a single premium, there are certain 
things we must know before we can proceed: 

1. The age for which the premium is desired. 

2. The number of years (the term) for which the 

insurance is to run. 

151 







152 LIFE INSURANCE FUNDAMENTALS 

3. The table of mortality from which we are to take 

our death rates. 

4. The rate of interest which we assume will be 

earned. 

In this case the information required is as follows: 

1. The age is 35. 

2. The term of insurance is five years. 

3. The American Experience Table of Mortality will 

be used. 

4. The assumed rate of interest is 3 per cent. 

We must always ascertain from the mortality table 
the number of deaths that will occur at each age during 
the term of insurance. 

Then, assuming, as we always do, that each person 
in the group living at the insuring age will be insured 
for #1,000, we list the death claims to be paid at the end 
of each year during the term. 

In the present problem the number of deaths occurring 
during the five-year term, beginning at age 35, and the 
death claims are as follows: 

Age No. Dying Amount of Death Claims 


35 

732 

X 

t*. 

V# 

8 

O 

11 

#732,000 

36 

73 7 

X 

1,000 = 

737,000 

37 

742 

X 

1,000 = 

742,000 

38 

749 

X 

1,000 = 

749,000 

39 

756 

X 

1,000 = 

756,000 


If the premiums to carry the insurance for the five- 
year period are to be paid in a single sum, at the begin¬ 
ning of the period, then, as the money collected will 


NET SINGLE PREMIUM i S3 

earn 3 per cent interest, we must find what amount of 
money paid now, plus 3 per cent interest, will enable 
us to pay out at the end of each of the five years the 
amounts of death claims just stated— i. e., we must 
ascertain the present value of the death claims to be 
paid. It is clear that the sum of money collected at 
age 35 will not all be invested for the full five years 
It would all be invested at the beginning of the period, 
or term, at 3 per cent, and at the end of the first year 
3732,000 would be disbursed in death claims. Then, 
the remaining balance would draw interest at 3 per cent 
for the second year, at the end of which we should pay 
out the second year’s death claims, 3737,000. The bal¬ 
ance on hand would earn interest till the end of the third 
year, when $742,000 of claims would be paid. Again, 
the balance would earn interest during the fourth year,' 
at which time the fourth year’s death claims of $749,000 
would be paid out. If our calculations of the amount 
of premiums to be collected were correct and if we suc¬ 
ceeded in earning exactly 3 per cent interest during 
each of the five years, there would be on hand at the 
beginning of the fifth year just that sum of money which, 
with interest at 3 per cent, would at the end of the 
fifth year amount to the death claims then due, viz., 
£756, OOO. 

How shall we find the amount of money to collect 
in a single sum at age 35, which, with 3 per cent interest 
added at the end of each year, would enable us to pay 
the death claims due at the end of each of the five years 
of the insurance term? That is, how shall we find the 
present value of the death claims due at the end of 
each year for a series of five years starting at age 35? 


154 LIFE INSURANCE FUNDAMENTALS 
By discounting each year’s death claims as follows: 
1 st year’s death claims to be discounted for I year. 


2d 

it 

it 

tt 

a 

tt 

tt 

a 

2 years. 

'*d 

it 

a 

a 

a 

a 

it 

it 

3 “ 

J 

4th 

it 

a 

u 

a 

a 

it 

a 

4 “ 


it 

a 

a 

u 

a 

it 

it 

r* * c 


5 tn 5 k 

Interest on the present value of the first year’s death 
claims would stop at the end of one year; interest on 
the present value of the second year’s death claims 
would stop at the end of two years, etc. 

DISCOUNT IS THE CONVERSE, OR OPPOSITE, OF INTEREST 

One dollar with interest at 3 per cent for one year is 
#1.03. Interest adds to the principal sum. On the 
other hand, $1 discounted at the same interest rate, 3 per 
cent, for one year is $.97 + . Discount takes away from 
the principal. 

If we wanted to compute $1 compounded annually 
for a period of one to five years, we should multiply 
$1 by 1.03, then multiply the result by 1.03, and multi¬ 
ply that result by 1.03, repeating the operation for a 
total of five times, thus: 

1st year 2d year 3d year 

$1 X 1.03 = $1.03 X 1.03 = #1.06 X 1.03 = 1.09 
4th year 5th year 

X 1.03 = 1.12 X 1.03 = $1.15. 

and we could tabulate the results of $1 at 3 per cent 
compound interest for five years as follows: 

$1.03 
1.06 


1st year, 
2d “ 


NET SINGLE PREMIUM 155 

3d year #1.09 

4th “ 1.12 

5 th « 1.15 

The above tabulation is not very accurate, because 
the multiplication is not carried beyond two decimal 
places. The following is correct: 

COMPOUND INTEREST TABLE 


$1 at 3 per cent interest from one to five years . 


1st year, 
2d “ 
3d “ 
4th “ 
5th “ 


£1.03 
1.0609 
1.092727 
1.125509 
1.159274 


Actually, of course, we cannot split 1 cent. But 
the importance of using several decimals is seen in 
computing compound interest, for, say, $1,000, which 
could easily be obtained by multiplying the table for 
$1 by 1,000. 


$iyOOO at 3 per cent compound interest from 1 to 3 years . 


1st year, 
2d “ 
3d “ 
4 th “ 
5 th “ 


$1,030 

1,060.90 

1,092.727 

1,125.509 

1,159.274 


In life-insurance calculations, six or more decimal 
places are desirable, as great accuracy is necessary 
and since large sums of money are involved. 

If we wish to reverse the process and discount $1 for 


156 LIFE INSURANCE FUNDAMENTALS 

a series of i to five years (compound discount), instead 
of multiplying to increase our principal, we shall divide, 
in order to decrease it, as follows (carrying to six decimal 
places): 

ist Year 2d Year 3d Year 

#1 -M.03 =#.970874 -7-1.03 =#.942596 -M.03 =#.915142 
4th Year 5th Year 

- 7 * 1.03 =#.888487 -r- 1.03 = #.862609 

We could then tabulate as follows: 

COMPOUND DISCOUNT TABLE 1 

Present value of $1 due at the end of one to five years 
at 3 per cent compou?id interest. 


1st 

year, 

$.970874 

2d 

<< 

.942596 

3d 

<< 

.915142 

4th 

u 

.888487 

5th 

<( 

.862609 


And the discount or present value of #1,000 could 
quickly be obtained by multiplying the present value 
of #1 in the above table by 1,000. 

Present value of $1,000 due from one to five years hence 
at 3 per cent compound interest. 


ist year, 

$970,874 

2d “ 

942.596 

3 d “ 

915.142 

4th “ 

888.487 

5th “ 

862.609 


1 Study the compound interest and discount tables in your company’s 
rate book. 


NET SINGLE PREMIUM 157 

The series of death claims due at the end of each of 
five years, starting at age 35, could be discounted 
by division, just as we have discounted $1, thus: 


Present value of death claims due from one to five years 
hence at 3 per cent compound interest. 

Solution I: Present Value 


Due at end of 1st year 
“ “ “ 44 2d “ 

44 44 44 44 3d 44 

.. 4th 44 

. 4 5th 44 


{ 


$732,0004-1.03 

(737.000-M.03) 

[(742,0004-1.03) 

(749,0004-1.03) 

[(756,0004-1.03) 


4-1.03 
4-1.03 
4-1.03 
4-1.03 


4-1.03 

4-1.03} 

4-1.03} 


= $710,679.61 
- 694,693.185 
= 679,035.11 
1.03 = 665,476.798 

1.03)4-1.03- 652,132.237 


Total present value of death claims due during the insurance term of 
five years, starting at age 35. 


$3,402,010,940 


Since it would be a long operation to divide several 
times by 1.03, it would be simpler and more economical 
to take the above table showing the present value of 
$1 due from one to five years hence and multiply the 
various present values of $1 by the amount of the 
claims due respectively at the end of one, two, three, 
four, and five years, thus: 


Solution II: 


Due at end 

P. V. of 


D. c. 

P. V. of 

of Year 

$1.00 


Payable 

D. C. 

1 

.970874 

X 

O 

O 

O 

#N 

C4 

CO 

= #710,679.768 

2 

.942596 

X 

737,000 

= 694,693.252 

3 

.915142 

X 

742,000 

= 679,035.364 

4 

.888487 

X 

749,ooo 

= 665,476.763 

5 

.862609 

X 

756,000 

= 652,132.404 


Total present value of death claims 
due during the insurance term of five 
years, starting at age 35. $3,402,017,551 


A slight difference is noted between the total present 
values in solutions I and II above, as well as between 







158 LIFE INSURANCE FUNDAMENTALS 

the present values for the various years. The figures 
in Solution I are more accurate than those in Solution 
II because, in I, by division the results are carried out 
exactly to the third decimal place. In Solution II, 
instead of dividing we used the discount factors .970874, 
etc. If these factors were carried to further decimal 
places, they would be sometimes a trifle more, some¬ 
times a trifle less than the factors given in our table. 
For example, .970874 extended three more places is 
.97087379; but for our purposes it is quite accurate 
enough to drop the 79 and change the sixth decimal 
from 3 to 4. When we use the factor .970874 to dis¬ 
count large sums, we will get a slightly larger result 
than if we used .9708739 or divided our death claims 
by 1.03. On the other hand, in computing the factors, 
if the seventh decimal were less than 5 we should drop 
it without increasing the sixth decimal figure, and in 
this case the use of the factor would give a smaller 
result than the division by 1.03. The inaccuracies 
are so slight for such large amounts as to be neg¬ 
ligible; but the errors are plus at some ages and minus 
at others, so that they balance one another to some 
extent. 

Having found the sum which is the present, or 
discount, value of the series of death claims payable at 
the end of the first to the fifth years, respectively, of the 
insurance term, viz., $3,402,017,551, it is a simple matter 
to ascertain the share of this amount which must be 
paid by an individual, by dividing the total present 
value of the death claims by the number of persons 
living at the beginning of the five-year term— i. e. y at 
age 35? ^*2., 81,822, thus: 


NET SINGLE PREMIUM 159 

£3,402,017.551 4-81,822 =£41.578 =£41.58 = 

Net single premium of five-year term insurance at 
age 35 (American Experience Table and 3 per cent 
interest). 

A “net single premium ” is the individual share of the 
present value of the estimated death claims. It is the 
mortality charge without any provision for paying 
operating expenses, etc. When such a provision is 
added, we have what is called the “gross” premium. 
“Gross,” or “office” premiums are the ones quoted in 
the companies’ rate books. 

While £41.58 is the rate which a company using the 
American Experience Table and 3 per cent interest 
would require of an individual 35 years old as his “net” 
single premium for a £1,000 five-year term insurance, 
we must have in mind that no one could insure one per¬ 
son only at this rate. If this were attempted, the 
undertaking would be merely a bet of £41.58 against 
£1,000 that the individual would die during the five- 
year period. If the individual died during the five 
years, the company would lose the difference between 
£1,000 and the sum of the £41.58, and whatever interest 
had been earned. Yet, because of the certainty of 
average mortality in large groups of people, the com¬ 
pany can insure a large number of persons 35 years 
old at £41.58 (exclusive of any charge for expenses) for 
five years without the risk of losing money; for the 
large number living at the beginning of the term will 
pay a total sum which with the required interest will 
provide enough money at the end of each year to pay 
the death claims that have occurred during the year. 


CHAPTER XII 


COMPARING NET NATURAL AND SINGLE PREMIUMS—FIVE- 
YEAR TERM SINGLE-PREMIUM RESERVES—THE 
WHOLE-LIFE NET SINGLE PREMIUM 


S O far as the company’s ability to pay its death 
claims is concerned, it does not matter whether it 
collects the natural, or one-year term, premium from 
those living at the beginning of each of the five years or 
whether each of the total group living at the beginning 
of the five-year period pays the net single premium. 

Under the one-year plan, the premiums collected at 
the beginning of the first year plus one year’s interest 
at 3 per cent suffice to pay the first year’s death claims. 
The second-year premiums and interest will pay the 
second year’s death claims, etc. At the end of five 
years all claims will have been paid. 

Under the single-premium plan, the total sum 
collected at the beginning of the period plus interest 
on the decreasing balances on hand after the successive 
years’ death claims have been paid will be sufficient to 
pay each year’s claims from the first year to the fifth 
year, inclusive. 


160 


COMPARING NET PREMIUMS 161 

Let us add the five net natural premiums: 


1st year, 

$8.69 

2d 

« 

8.82 

3 d 


8.97 

4th 

u 

9 -i 3 

5 th 

a 

9 - 3 i 

Total 

$44.92 


The total of the five one-year term net premiums, 
$44.92, is greater than the net single premium of $41.58 
by $3.34. But the company does not really receive 
any more money on the one plan than on the other. 
That is clearly shown by the fact that the total of dis¬ 
bursements provided for by the net premiums on each 
plan is exactly the same. To be sure, the total collected 
from policyholders on the one-year term plan is larger 
than the sum collected in single premiums; but the 
difference is made up in the single-premium plan by 
the larger amount of interest that is earned, as is 
proven below: 


Table Showing Premium Collections, Interest Earned, and Death 
Claims Paid for Five Years on the One-year Term Plan, Beginning 
at Age 35. 



No. 

Year’s 

Total 

Year’s 

Year’s 


Living Premiums 

Premiums 

Interest Death Claims 

1st year 

81,822 pay 

to. 

00 

& 

II 

$711,033.18 

$21,330,995 

$732,000 

2 d “ 

81,090 “ 

8.82 = 

715,213.80 

21,456.414 

737,000 

3 d “ 

8o,3S3 “ 

8.97 = 

720,766.41 

21,622.992 

742,000 

4th “ 

79,611 “ 

9.13 = 

726,848.43 

21.805.453 

749,000 

5 th “ 

78,862 " 

9.31 = 

734,205.22 

22,026.157 

756,000 

Total premiums, five years.. . 

$3,608,067.04 

$108,242,011 

$3,716,000 

“ interest 

a 

• • • • 

108,242.01 




Total received by company $3,716,309.05 







162 LIFE INSURANCE FUNDAMENTALS 


There is an inaccuracy, or difference, of $309.05 
between the sum of the net premiums collected and the 
interest earned at 3 per cent during the five years and 
the total amount of the death claims for the same period. 
This difference is unavoidable and is due to the fact 
that the premiums charged cannot be in fractions of a 
cent. Each premium is a trifle more or less than the 
exact individual share of the present value of the death 
claims. Adding to the premiums collected interest for 
each year, it is found that in some years the total is a 
trifle more, in some a trifle less, than the amount of the 
year’s death claims; but the five years’ totals are suffi¬ 
cient to pay the five years’ death claims. 

Table Showing Single-Premium Collections, Interest Earned, and Death 
Claims Paid for a Five-Year Term Insurance, Age 35. 

No. Living 1st Year Net Single Premium Total Premiums 

81,822 X $41.58 = $3,402,158.76 

Year’s In- Year’s 

Amount Begin- terest 3 Per Total Insur- Death Balance at End 

ning of Year Cent ance Fund Claims of Year 

1st Year $3,402,158.76 $102,064.7628 $3,504,223.5228 $732,000 $2,772,223.5228 

2d “ 2,772,223.5228 83,166.7057 2,855,390.2285 737,000 2,118,390.2285 

3d “ 2,118,390,2285 63,551.7069 2,181,941.9354 742,000 1,439,941.9354 

4th “ 1,439,941.9354 43,198.2581 1,483,140.1935 749,000 734,140.1935 

5th “ 734,140.1935 22,024.2058 756,164.3993 756,000 164.3993 


$3 716 000 

Total interest, five years $314,005.6393 
Total single premiums 3,402,158.76 


Total received by Co. $3,716,164.3993 


The excess of $164.40 is due to the same cause just 
explained in connection with the Net Natural Premium 
Table. 

The purpose of these two calculations is to prove that 
the difference between the sum of the five net natural 
premiums, starting at age 35, or $44.92 and $41.58, 
the net single premium for a five-year term at age 35 
(a difference of $3.34), was exactly made i*p by the 
greater amount of interest to be earned on the net 





COMPARING NET PREMIUMS 163 

single premiums. The following comparison proves 
the statement: 



Total Premiums 

Total Interest 

Total Fund 

Total 

Death 

Claims 

Net Natural Premium 
Plan. 

$3,608,067.04 

3,402,158.76 

$108,242.01 

314,005.639 

$3,716,309.05 1 

3,716,164.399 1 

$3,716,000 

3,716,000 

Net Single-Premium 
Plan. 

Difference in Premiums 
and Interest. 

$205,908.28 2 

$205,763.629 2 | 


The above comparison is an excellent method of 
showing the truth of the statement frequently heard, 
that certain life-insurance plans are mathematically 
equivalent. We have seen that the net natural-pre¬ 
mium plan and the net single-premium plan are equiv¬ 
alent in that the same end is accomplished with the 
same total sums of money. There is, however, a 
difference between the total amount of premiums 
actually paid by the insured on equivalent plans. But 
the difference is made up by interest. With groups of 
equally desirable lives, it doesn’t matter to the com¬ 
pany which of the two plans is used to obtain the same 
result. 

PROVING THE SUFFICIENCY OF THE NET PREMIUMS 

The two tabulations just given serve to prove the 
accuracy of our premium calculations, showing that, 
if the premiums calculated are collected as required 
and the money on hand from year to year is kept 
invested at the assumed interest rate during the term 
of the insurance, all death claims will be paid; in other 
words, the premiums are found to be sufficient; for the 

1 Disregard the excess of $309.05 and $164.40 as exp l a ine d above. 

* These two sums would be exactly the same, if each operation in the entire problem 
had been carried out to a sufficient number of decimal places. 


















164 LIFE INSURANCE FUNDAMENTALS 

premiums and interest have created sufficient funds to 
pay all death claims of the group. 

THE SINGLE-PREMIUM RESERVE 

In the single-premium table, it is interesting as well 
as important to consider the balances on hand at the 
end of each year, after the year’s death claims have 
been deducted. Assuming that the single premium 
collected from each member of the group of 81,822 
persons living at age 35 was correctly calculated and 
that in each year we shall earn 3 per cent on the money 
on hand, it is clear that the invested balances held at the 
end of the successive years must remain intact. These 
invested balances plus the interest earned at 3 per cent 
must suffice to pay future death claims; for the single 
premiums having been collected in full, no more money 
will be received from the policyholders. To conserve 
the funds represented by these year-end balances is one 
of the most important duties of the officials of a 
life-insurance company. 

Technically, the balance on hand at the end of the 
year, after payment of death claims, is known as the 
“reserve. ” 

Not only is the reserve the correct balance on hand 
at the end of the year, after the year’s death claims, 
provided for in accordance with the mortality table, 
have been paid; it is also that sum of money which 
together with the interest to be earned, at the rate used 
in computing the net premium, will be sufficient to pay 
all future death claims. In view of the purpose of the 
reserve, it is obviously a liability , so long as the company 
remains obligated under its policy contracts. 


THE RESERVE 165 

If this year-end balance, or “reserve,” should be 
reduced, the company would not have on hand enough 
money so that, with interest, it could meet its death 
claims, and it would, therefore, be insolvent. 

The life-insurance single premium reserve fund must 
always be that sum which, with interest at the “as¬ 
sumed ” rate, will suffice to pay all the company’s 
future death claims. 

Of course, there are no year-end balances, or reserves, 
on the natural, or one-year term, plan, for the pre¬ 
miums collected at the beginning of a year plus the 
interest earned during the year just equal the death 
claims expected for the year and due at the end of 
the year. 


THE TERMINAL RESERVE 

The reserve— i. e ., the year-end balance after paying 
the year’s death claims—is known as the “terminal 
reserve. ” As it is the total reserve for all the policies, 
we call it the “aggregate terminal reserve.” 

If it were desired, at the end of a certain year, to 
dissolve the company and transfer the insurance to 
another company, the latter could assume the liability 
of the former company’s death claims, provided it 
received the full aggregate terminal reserve— i. e ., if 
the value of the investments turned over by the first 
company was at least as great as the aggregate terminal 
reserve. Such a transaction is known as “reinsur¬ 
ance,” and we speak of the aggregate reserve as the 
“reinsurance reserve,” since it is necessary in order to 
reinsure a company’s risks. 




166 LIFE INSURANCE FUNDAMENTALS 


THE INDIVIDUAL RESERVE 

If a solvent company should be dissolved at the end 
of any year and should not reinsure, it would have, in 
investments, the full aggregate terminal reserve for 
which there would be no further obligation to pay 
death claims. This fund could be divided equally 
among the survivors, and the amount due to each, 
which we may call the individual terminal reserve , would 
be the total, or aggregate , terminal reserve divided by the 
total number of survivors. 

From the above table of aggregate terminal reserves 
for a single premium five-year term policy of $1,000, we 
derive the individual terminal reserves as follows: 



Age 

Beginning 

Age 
at End 

Aggregate 

Number 

Individual 

Term. 

Year 

of Year 

of Year 

Term. Reserve 

Living 

Reserve 

1 

35 

36 

$2,772,223.52 - 4 - 

81,090 = 

$34,187 

2 

36 

37 

2,118,390.2256 -f 

80,353 = 

26.363 

3 

37 

38 

1 > 439 , 94 1 -93 23 

79,611 = 

18.087 

4 

38 

39 

734,140.1603 4 - 

78,862 = 

9-309 

5 

39 

40 

164.399 




There should be no balance at the end of the fifth 
year. This $164.40 is an error due to the fact that in 
collecting the net single premium we cannot collect 
the exact amount, $41,578, but must collect to the 
nearest cent, $41.58. 

Note for example, that the number living at the end 
of the first year is that for age 36, and not for age 35. 
At the beginning of the year the group have completed 
their thirty-fifth year and are entering their thirty- 
sixth year. At the end of the year they are 36 years 
old. It would be incorrect to obtain the first-year 
individual terminal reserve by dividing 81,822 (the 



VARIOUS TERM INSURANCES 167 

number living at age 35) into the total first-year 
terminal reserve. 

It is obvious that there would be no terminal reserve 
for the last year. The last year’s death claims have 
been paid, and, as the company has no obligations 
beyond the fifth year, no premiums were collected for 
any further insurance payments. There are, therefore, 
no funds left—no year-end balance or terminal reserve. 


INSURANCE FOR VARIOUS DURATIONS 


It has been shown that premiums can be calculated 
to insure a large group of lives for one year at a time, 
on the one-year term plan, or for a period of years in 
advance, as on the single-premium five-year term plan. 
Net single premiums can likewise be calculated for any 
other term of years. 

Referring to the computation of the single premium 
for a five-year term insurance, if we desired to find the 
net single premium for a three-year term insurance at 
age 35, we should simply find the present value of the 
death claims due at the end of each of the first three 
years (instead of five), add these, and divide the total 
by the number of persons living at age 35, viz., 81,822, 
thus: 


= $710,679,768 
= 694,693.252 

= 679,035.364 


.970874 X $732,000 
.942596 X 737,000 
.915142 X 742,000 
Total Present Value of D. C. for the 

three years . 

$2,084,408,384 -f- 81,822 = $25,475. 

Net single premium for three-year term insurance 


$2,084,408,384 


at age 35. 



168 LIFE INSURANCE FUNDAMENTALS 

The net single premium for a four-year term insurance 
at age 35 would be found in the same way— i. e.> by 
adding to the total of the present values of the death 
claims for three years the present value of the fourth 
year’s death claims and dividing the total for the four 
years by 81,822. 

If it is desired to find the net single premium for 
terms of ten, twenty, thirty, or forty years, the same 
process would be used. We should first find the total 
of the present values of the death claims for a series 
of ten, twenty, thirty, or forty years, starting at age 
35, then divide the total of these present values by 
81,822. 

Or, we could select any age to which it was desired 
to carry the insurance, as, for instance, age 65, 80, 
or 96, and calculate the net single premium necessary 
to insure a group of persons to a given age. If we 
wished to compute the net single premiums at age 35, 
for insurances to age 65 and also to age 96, we should 
merely discount the death claims for 30 and 61 years, 
beginning at age 35 in each case, add up the 30 present 
values and divide the total by 81,822; and then add up 
the 61 present values (really only adding to the sum of 
the 30 present values the 31 additional ones) and divide 
the total by 81,822. The two quotients would be the 
net single premiums for insurances from age-35 to ages 
65 and 96, respectively. 

WHOLE LIFE INSURANCE 

Referring to the mortality table on page 140, we find 
that 96 is the age limit of the group— i. e., the limit of 
life, according to our statistics. It is assumed from the 


WHOLE LIFE NET PREMIUM 169 

statistics gathered and incorporated in this table, that 
before attaining age 96 the last survivor of the group 
will have died. Therefore, if we computed a single 
premium for insurance to age 96 we should in reality 
have calculated a “whole life” premium; for if all the 
members of the group living at, say, age 35, paid into 
the company’s treasury the net single premium neces¬ 
sary, with interest added from year to year, to pay 
$1,000 for each death occurring (according to the table) 
from age 35 up to age 96, our insurance would indeed 
have covered the whole, or entire, life of the group. 
Policies of such insurance are technically known as 
“whole life” policies. Not only do we have single¬ 
premium “whole life” policies, but ordinary life 
policies, twenty-payment life policies, and other 
limited-payment life policies are also “whole life” 
policies, as will be presently explained. 

THE WHOLE-LIFE NET SINGLE PREMIUM 

In order to find the whole-life net single premium 
for age 35, discounting the death claims for a series of 
sixty-one years (ages 35 to 95 inclusive), we must have 
a discount table which would be an extension of the 
one shown on page 156 giving the present value of $1 
due at the end of each year, from one to five years. 
The following table shows how a whole-life single 
premium may be calculated for age 35: 


COMPUTATION OF WHOLE LIFE NET SINGLE PREMIUM 
AGE 35—AM. EXP. TABLE, 3% INTEREST 


Number Present 


Year 

1 

Age 

35 

Surviving 
According to 
Table Yearly, 
Each Insured 
for $1,000 

81,822 

Death 

Claims 

Payable 

Yearly 

$732,000 

X 

Worth of 
$1 Due at 
the End of 
a Term of 
Years 

.970874 


Present 
Worth of 
Future Death 
Claims Yearly 

$710,679,768 

2 

36 

81,090 

737,000 

X 

.915142 

*» 

694,693.252 

3 

37 

80,353 

742,000 

X 

.915142 

mm 

679,035.364 

4 

33 

79,611 

749,000 

X 

.888487 

ma 

665,476.763 

5 

39 

78,862 

756,000 

X 

.862609 

— 

652,132.404 

6 

40 

78,109 

765,000 

X 

.837484 

a 

640,675.260 

7 

41 

77,341 

774,000 

X 

.813092 

mm 

629,333.208 

8 

42 

76,567 

785,000 

X 

.789409 

mm 

619,686.065 

9 

43 

75,782 

797,000 

X 

.766417 

■B 

610,834.349 

10 

44 

74,985 

812,000 

X 

.744094 

— 

604,204.328 

11 

45 

74,173 

828,000 

X 

.722421 


598,164.588 

12 

46 

73,345 

848,000 

X 

.701380 

m3 

594,770.240 

13 

47 

72,497 

870,000 

X 

.680951 

mm 

592,427.370 

14 

48 

71,627 

896,000 

X 

.661118 

am 

692,361.728 

15 

49 

70,731 

927,000 

X 

.641862 

— 

595,006.074 

16 

50 

69,804 

962,000 

X 

.623167 

_ 

599,486.654 

17 

51 

68,842 

1,001,000 

X 

.605016 

mm 

605,621.016 

18 

52 

67,841 

1,044,000 

X 

.587395 

mm 

613,240.380 

19 

53 

66,797 

1,091,000 

X 

.570286 

mm 

622,182.026 

20 

54 

65,706 

1,143,000 

X 

.553676 

— 

632,851.668 

21 

55 

64,563 

1,199,000 

X 

.537549 

_ 

644,521.251 

22 

56 

63,364 

1,260,000 

X 

.521893 

am 

657,585.180 

23 

57 

62,104 

1,325,000 

X 

.506692 

mm 

671,367.900 

24 

58 

60,779 

1,394,000 

X 

.491934 

mm 

685,755.996 

25 

69 

59,385 

1,468,000 

X 

.477606 

— 

701,125.608 

26 

60 

57,917 

1,546,000 

X 

.463695 

a. 

716,872.470 

27 

61 

56,371 

1,628,000 

X 

.450189 

trm 

732,907.692 

28 

62 

54,743 

1,713,000 

X 

.437077 

mm 

748,712.901 

29 

63 

53,030 

1,800,000 

X 

.424346 

mm 

763,822.800 

30 

64 

51,230 

1,889,000 

X 

.411987 

mm 

778,243.443 

31 

65 

49,341 

1,980,000 

X 

.399987 

mm 

791,974.260 

32 

66 

47,361 

2,070,000 

X 

.388337 

mm 

803,857.590 

33 

67 

45,291 

2,158,000 

X 

.377026 

mm 

813,622.108 

34 

68 

43,133 

2,243,000 

X 

.366045 

mm 

821,038.935 

35 

69 

40,890 

2.321,000 

X 

.355383 

mm 

824,843.943 

36 

70 

38,569 

2,391,000 

X 

.345032 

mm 

824,971.512 

37 

71 

36,178 

2,448.000 

X 

.334983 

a 

820,038.384 

38 

72 

33,730 

2,487,000 

X 

.325226 

mm 

808,837.062 

39 

73 

31.243 

2,505,000 

X 

.3157.54 


790,963.770 

40 

74 

28,738 

2,501,000 

X 

.306557 

— 

766,699.057 

41 

75 

26,237 

2,476,000 

X 

.297628 

mm 

736,926.928 

42 

76 

23,761 

2,431,000 

X 

.288959 

mm 

702,459.329 

43 

77 

21,330 

2,369,000 

X 

.280543 

mm 

664,606.367 

44 

78 

18,961 

2,291,000 

X 

.272372 

mm 

624,004.252 

45 

79 

16,670 

2,196,000 

X 

.264439 

— 

580,707.044 

46 

80 

14,474 

2,091,000 

X 

.256737 


536,837.067 

47 

81 

12,383 

1,964,000 

X 

.249259 

mm 

489,544.676 

48 

82 

10,419 

1,816,000 

X 

.241999 

mm 

439,470.184 

49 

83 

8,603 

1,648,000 

X 

.234950 


387,197.600 

50 

84 

6,955 

1,470,000 

X 

.228107 

— 

335,317.290 

51 

85 

5,485 

1,292,000 

X 

.221463 

«. 

286,130.196 

52 

86 

4,193 

1,114,000 

X 

.215013 

mm 

239,524.482 

53 

87 

3,079 

933,000 

X 

.208750 

SB 

194,763.750 

54 

88 

2,146 

744,000 

X 

.202670 

■a 

150,786.480 

55 

89 

1,402 

555,000 

X 

.196767 

mm 

109,205.685 

56 

90 

847 

385.000 

X 

.191036 

mm 

73.548.S60 

57 

61 

462 

246,000 

X 

.185472 

mm 

45,626.112 

58 

92 

216 

137,000 

X 

.180070 

mm 

24,669.590 

59 

93 

79 

58,000 

X 

.174825 

am 

10,139.850 

60 

94 

21 

18,000 

X 

.169733 

ma 

3,055.194 

81 

95 

3 

3,000 

X 

.164789 

- 

494.367 


$34,355,629,670 


170 



WHOLE-LIFE NET PREMIUM 171 

The sum of $34,3 55,629.670, the total of the present 
values of all the death claims from ages 35 to 95, 
inclusive, divided by 81,822 the number living at the 
age 35 give the net single premium for a whole- 
life policy at age 35: 

#34>355>6 2 9*67° -r- 81,822 = $419.88 = Whole Life 
Net Single Premium, age 35. 

THE “power” OF COMPOUND INTEREST 

The problem of the whole-life net single premium at 
age 35 gives us an excellent idea of the effect of com¬ 
pound interest earned over a long term of years. The 
net single premium of $419.88 required of each member 
of the group is only about 42 per cent of the $1,000 
which will be paid as a death claim upon the death of 
each one. The total premium collections amount to 
$34,355,629.67, while the total amount of death claims 
to be paid is $81,822,000. The difference between the 
two sums is $47,466,370.33, is the total amount of interest 
earned during the sixty-one years. The results seem 
all the more surprising to the average person, not very 
familiar with compound-interest figures, in view of the 
fact that payments of large sums annually are made 
from the very beginning, $732,000 being disbursed at 
the end of the first year. 

Persons insured in life-insurance companies do not as 
a rule realize that the premiums they deposit constitute 
a comparatively small portion of the payments even¬ 
tually made to their beneficiaries. » 

In the above single-premium computation it is inter¬ 
esting to note that about 1 6}4 cents at 3 per cent 
compound interest for sixty-one years amounts to $1.00. 


172 LIFE INSURANCE FUNDAMENTALS 

Only $494.37 is required of the group at age 35 to pay 
the $3,000 of death claims in the last year. The power 
of compound interest is also well illustrated by the 
following: $1,000 invested at 3 per cent compound 
interest for a period of sixty years would amount to 
$5,891.60; at 3 )/2 per cent compound interest for sixty 
years, $1,000 would amount to $7,878.10. 

NET SINGLE PREMIUM (RESERVE) TABLE 

The following net single-premium tables give the 
amounts of the whole-life net single premiums, or net 
single premium reserves, per $1,000 of insurance; on 
the basis of the American Experience Table. At any 
age the net single premium and the net single premium 
reserve are identical. Each may be defined as that 
sum of money w T hich with future interest at the as¬ 
sumed rate will pay all future death claims (according 
to the table). At age 35, the whole-life net single pre¬ 
mium (3 per cent) is $419.88. This is also the initial 
reserve at age 35; and it is the terminal reserve for 

age 34. 


• 

3 Per Cent 1 

Pres- 

Net Single 

Pres- 

Net Single 

ent 

Premium 

ent 

Premium 

Age 

or Reserve 

Age 

or Reserve 

20 

330.94 

60 

666.72 

21 

335*68 

61 

678.13 

22 

340.57 

62 

689.51 

23 

345.62 

63 

700.83 

24 

350.82 

64 

712.08 

25 

356.18 

65 

723.24 

26 

361.72 

66 

734.27 

27 

367.43 

67 

745 *i 6 

28 

373-32 

68 

755.89 

29 

379*39 

69 

766.42 

30 

385.64 

70 

776.73 

31 

392.09 

7 1 

786.82 

32 

398.73 

72 

796.67 

33 

405.58 

73 

806.28 

34 

412.63 

74 

815.70 

35 

419.88 

75 

824.93 

36 

427.36 

76 

834*01 

37 

435*04 

77 

842.97 

38 

442.95 

78 

851.80 

39 

45i*o7 

79 

860.49 

40 

459*42 

80 

869.06 

4i 

468.00 

81 

877.42 

42 

476.80 

82 

885.60 

43 

485*83 

83 

893.63 

44 

495.10 

84 

901.59 

45 

504.59 

85 

909.51 

46 

5i4*3o 

86 

917.32 

47 

524*23 

87 

924.88 

48 

534*37 

88 

932.02 

49 

544*70 

89 

938.75 

50 

555*22 

90 

945*23 

5 i 

565*89 

91 

95I-58 

52 

576.71 

92 

957*49 

53 

587.67 

93 

962.31 

54 

598.74 

94 

966.84 

55 

609.92 

95 

970.87 

56 

621.18 

96 

1,000.00 

57 

632.51 



58 

643*89 



59 

655.30 


. 


3K Per Cent 1 


Pres¬ 

ent 

Age 

Net Single 
Premium 
or Reserve 

Pres¬ 

ent 

Age 

Net Single 
Premium 
or Reserve 

20 

284.97 

60 

626.92 

21 

289.40 

61 

639.24 

22 

293.99 

62 

65 I- 5 S 

23 

298.73 

63 

663.83 

24 

303.65 

64 

676.07 

25 

308.73 

65 

688.24 

26 

314.01 

66 

700.30 

27 

31947 

67 

712.23 

28 

325.12 

68 

724.01 

29 

330.97 

69 

735 * 6 o 

30 

337.02 

70 

746.98 

3 i 

343*28 

7 i 

. 758.13 

32 

349.76 

72 

769.04 

33 

356.46 

73 

779.72 

34 

363*39 

74 

790.18 

35 

370.55 

75 

800.48 

36 

377*95 

76 

810.62 

37 

385.60 

77 

820.64 

38 

393-49 

78 

830.54 

39 

401.63 

79 

840.32 

40 

410.03 

80 

849.97 

4 i 

418.69 

81 

859.40 

42 

427.62 

82 

868.65 

43 

436.81 

83 

877.74 

44 

446.28 

84 

886.77 

45 

456.00 

85 

895*78 

46 

466.00 

86 

904.68 

47 

476.26 

87 

9 I 3-32 

48 

486.77 

88 

921.49 

49 

497*52 

89 

929.20 

50 

508.49 

90 

936.64 

5 i 

519.67 

9 i 

943*93 

52 

531*04 

92 

950.74 

53 

542.58 

93 

956.30 

54 

554*36 

94 

961.52 

55 

566.15 

95 

966.18 

56 

578.13 

96 

1,000.00 

57 

58 

59 

590.22 

602.39 

614.63 

' 



1 These tables are from Flitcraft’s Life Insurance Manual . 


173 

































CHAPTER XIII 


NET LEVEL PREMIUM—FIVE-YEAR TERM NET ANNUAL 
PREMIUM AND RESERVES 


T HUS far two methods of computing net, or mor¬ 
tality, premiums have been shown, the net natural, 
or one-year term, plan and the net single premium. 

It has been stated that the natural-premium plan is 
not practical for most people, since if they live to an ad¬ 
vanced age the cost of insurance becomes so high that it 
is a constantly increasing burden just at the time when 
the earning power of the majority of men is decreasing. 

The single-premium plan thus avoids this difficulty, 
but the majority of persons cannot afford to invest at 
one time sums as large as are required for single pre¬ 
miums. For example, the whole-life net single premium 
at 35 is $419.88 for $1,000 of insurance. If it were 
necessary for every man who needed an insurance that 
would pay $1,000 when he died, no matter how long he 
might live, to pay several hundred dollars in one sum, 
the majority would not insure; a $10,000 policy, at age 
35, would require a net single premium of $4,198.80. So, 
the single-premium plan is not practical in most cases. 1 

The premium plan that has proven to be the most 
practical is the level premium. The level premium is 
payable annually in the same amount every year. 
For example, at age 35, the net annual level premium 


1 The gross, or office, premium is, of course, still higher. 

174 


NET LEVEL PREMIUM 175 

for a whole-life policy (ordinary life) is $21.08 (3 per 
cent basis). The holder of an ordinary life policy 
would pay the same net premium every year up to and 
including his ninety-fifth year. (When he reached 96, 
he would have no more premiums to pay, the reason 
for which will be clear later.) By referring to the 3 per 
cent Net Natural Premium Table on page 148, we see, 
for example, that the net one-year-term premium would 
be $140.25 at age 80, $228.69 at age 85, $441.31 at age 
90, and $970.87 at age 95. Yet the net annual level 
premium is $21.08 every year for the man who insures 
at age 35 on the whole-life plan, even including the 
sixty-first payment at age 95, when the net one-year- 
term premium is $970.87. 

We must remember always that the death claims to be 
provided for are the same (American Experience Table) 
no matter whether we use the net natural premium, a 
net single premium, or a net annual level premium. 

COMPARING THE NET NATURAL AND NET LEVEL PREMIUMS 

It is interesting to compare the net annual premium 
with the net natural premium more closely. 

Turning to the table on page 148, we find that the 
person who insured on the one-year-term plan (3 per 
cent) at age 35 and continued his insurance on this plan 
for life would pay an increasing rate, as indicated by 
the following net natural premiums at various intervals: 


At age 35, 

$8.69 

At age 65, 

$38.96 

« “ , , 
4 :» 

IO.84 

“ “ 75 

91.62 

“ “ SS 

18.03 

“ “ 85 

228.69 

“ “ 57 
“ “ 58 

20.71 

22.27 

“ “ 95 

970.87 


176 LIFE INSURANCE FUNDAMENTALS 

If, at the same time, he subscribed for an ordinary life 
policy, also insuring him for life, his premiums every 
year would be $21.08. At ages from 35 to 57, both 
inclusive, the policyholder would pay on the annual- 
premium whole-life basis (ordinary life) more than the 
net natural-premium rate. But at age 58 the level 
premium of $21.08 would begin to afford a premium 
saving; for at age 58 and every year thereafter the net 
one-year-term premium is greater than the net annual 
level premium on the whole-life plan. As the student 
has, no doubt, already suspected, the level annual 
premium is an average of the net one-year-term pre¬ 
miums, in the sense that enough more than is necessary 
is collected in early years, so that the excess collections 
plus the interest on them, at 3 per cent, will be sufficient 
to make up for the deficiency of the level premiums in 
later years. 

Thus, despite the heavier cost of mortality in later 
years, the level-premium plan makes it unnecessary 
to pay an increasing and, perhaps, prohibitive rate. 

COMPUTING FIVE-YEAR TERM NET ANNUAL LEVEL 

PREMIUM 

The net annual level premium is derived, not from 
the net natural premium, but from the net single 
premium. In order to compute the net annual level 
premium for a five-year-term policy at age 35, we must 
know the amount of the net single premium for the 
same kind of insurance at the same age, viz., $41.58. 
This amount collected from each of the 81,822 persons 
living at age 35 will, with the interest to be earned, 
suffice to pay the death claims occurring during the 


NET LEVEL PREMIUM 


177 

five-year period. Our problem is to find a smaller 
amount which may be collected at the beginning of 
each year—the same amount each year—for five years 
from the gradually decreasing number of survivors and 
which shall be the equivalent of the net single premium 
of $41.58— i. e ., furnish enough money to pay the same 
amounts of death claims from year to year. 

This problem does not involve any discounting of 
death claims. On the contrary, it is concerned only 
with those persons living at the beginning of each year, 
who must pay the annual premiums. It is merely a 
problem of finding an annual level equivalent of the 
net single premium of $41.58. 

Suppose the 81,822 persons living at 35 were, each, 
carrying a very small five-year-term insurance which 
required them to pay annual level premiums of only 
$1 apiece. How much money would the company col¬ 
lect from the group ? The collections during the five 
years would be as follows, premiums being due at the 
beginning of the year: 


Age 

No. Living 

Premium 

Total Premiums 

35 

81,822 

X 

$1 = 

$81,822 

1st year 

36 

81,090 

X 

I = 

$81,090 

2d “ 

37 

80,353 

X 

I = 

#80,353 

3 d “ 

38 

79,611 

X 

I = 

$79,611 

4th “ 

39 

78,862 

X 

I = 

$78,862 

5th “ 


Suppose it was suggested that, instead of collecting each 
year the small premium of $1, the company notify 
the policyholders how much each could pay in a lump 
sum at the beginning of the period as a single premium; 


178 LIFE INSURANCE FUNDAMENTALS 

in other words what single premium would be the 
equivalent of the annual level premium of $i. Refer¬ 
ring to the table above, we note that, if annual payments 
are made at the beginning of each year, 


$81,822 will be due now 
$81,090 “ “ “ 1 year from now 

$80,353 “ “ “ 2 years “ 

$79,611 “ " “ 3 

$78,862 “ “ “ 4 


it 

it 


it 

« 


it 

a 

a 


If we assume we are going to earn 3 per cent interest 
and find the present value of the amounts of the pre¬ 
mium collections to be made one, two, three, and four 
years from now by discounting these amounts for one, 
two, three, and four years, respectively, the sum of 
these four present values plus $81,822, the amount of 
premiums to be collected now, would be the present 
equivalent or the present value of the five annual 
collections of $81,822, $81,090, $80,353, $79,611, and 
$78,862, respectively, thus: 


P. V. P. V. of 
of $1. Annl. Prems. 


Due now 81,822 X $1.000000 = $81,822.00 Prems. 

“ 1 yr. from now 81,090 X .970874 = 78,728.17 P. V. of 

“ 2 yrs. “ “ 80,353 X .942596 = 75,740.42 “ “ 

" 3.. 79,611 X .915142= 72,855.37 “ “ 

“ 4 . 78,862 X .888487 = 70,067.86 ** “ 


actually due now 
prems. due 1 yr. from now 
“ “ 2 yrs. “ “ 

«« ^ tt a it 

H tt a || || || 


Total P. V.’s $379,213.82 


If the total of the present values of the annual pre¬ 
miums due at the beginning of each year for five years 
were collected now by, say, a committee of policy¬ 
holders, they could pay $81,822 to the company for 
the first year’s premiums due now; then by investing 
the balance at 3 per cent they could at the end of the 
first year (the beginning of the second year), pay to the 



NET LEVEL PREMIUM 


179 

company $81,090, and also pay at the beginning of the 
third, fourth, and fifth years $80,353, $79,611, and 
$78,862, respectively, as the annual total of premiums 
of $1 due from the survivors to the company. 

Likewise, if the committee of the policyholders should 
turn over to the company the entire fund representing 
the present values of the annual premiums due at the 
beginning of each of the five years, the company could 
take out $81,822 for the first year’s premiums, invest 
the balance at 3 per cent, and then, at the beginning of 
the second, third, fourth, and fifth years, pay itself 
$81,090, $80,353, $79,611, and $78,862, respectively. 

It wouldn’t matter to the company whether it re¬ 
ceived $379,213.82 in one sum or whether it received 
$81,822, $81,090, $80,353, $79,611, and $78,862 at the 
beginning of each year, for the single sum, with the 
certainty of 3 per cent interest, and the annual payments 
are equivalent. 

■’ If we divide the total present value of the annual 
premiums of $1 by the number of persons living at the 
beginning of the five-year term, the result will be the 
single sum which with interest is equivalent to the an¬ 
nual level premium of $1, thus: 

$379,2 r 3.82 --- 81,822 = $4,635, which is the single 
sum equivalent to a five-year annual level premium of 
$1 at age 35, assuming 3 per cent will be earned. 

Now we know that the single premium of a five-year 
term policy at age 35 is $41.58. What five-year annual 
level premium is its equivalent? 

If $4,635 is the equivalent of a five-year annual level 
premium of $i, then the single premium of $41.58 is the 
equivalent of as many dollars of five-year annual level 


i8o LIFE INSURANCE FUNDAMENTALS 


premium as $4,635 is contained in $41.58 = $8,971, 
i.e.y $8.97, the net annual level premium of a five-year 
term insurance of $1,000 at age 35 (3 per cent). 

This may also be stated as follows: The single pre¬ 
mium of $4,635 is to the single premium of $41.58 
as the net level premium of $1 is to the net level pre¬ 
mium of $8.97; i.e ., $4,635: $41.58:: $1:$8.97. 

PROVING SUFFICIENCY OF FIVE-YEAR-TERM NET ANNUAL 

LEVEL PREMIUM 

The purpose of the following table is to show that the 
net annual level premium of $8,971 is sufficient, if 
collected from all survivors at the beginning of each 
year of the term, with 3 per cent interest on the funds 
on hand from year to year, to provide for all the death 
claims due during the five years of the insurance term. 
The number living at the beginning of each year and 
the number dying are taken from the American Experi¬ 
ence Table. 

The “initial reserve” is referred to in this table. 
It is the total fund at the beginning of the year which 
is to be invested for the year and which must earn the 
assumed rate of interest. It consists of the terminal 
reserve of the year just ended and the new premiums 
just collected. 

First Year: 

Number living 81,822 X $8,971, total 

first year premiums = $734,025,162 

Interest to be added for one year at 
3 per cent = 22,020.75486 

Total first year’s insurance fund 

(premiums, plus interest) = 756,045.91686 


NET LEVEL PREMIUM 181 


Death claims to be deducted = $732,000 

Balance at end of first year, aggre¬ 
gate terminal reserve = 24,045.91686 


Second Year: 

First year’s aggregate terminal re¬ 
serve 

Number living 81,090 X $8,971, 
total second year’s premiums 
Second-year aggregate initial reserve 
(terminal reserve and new pre¬ 
miums) 

Interest on initial reserve 
Total second year’s insurance fund 
(initial reserve plus interest) 

Death claims to be deducted 
Balance at end of second year, aggre¬ 
gate terminal reserve 


24,045.91686 

727 > 458.39 

751,504.30686 

22,545.12920 

774,049.43606 

737,000 

37,049.43606 


Third Year: 

Second year’s aggregate terminal 
reserve 

Number living 80,353 X $8,971, 
total third year’s premiums 
Third year aggregate initial reserve 
(terminal reserve plus new pre¬ 
miums) 

Interest on initial reserve 
Total third year’s insurance fund 
(initial reserve plus interest) 

Death claims to be deducted 
Balance at end of third year, aggre¬ 
gate terminal reserve 


37,049.43606 

720,846.763 


757,896.19906 

22,736.88597 

780,633.08403 

742,000 


38,633.08403 


182 LIFE INSURANCE FUNDAMENTALS 


Fourth Year: 

Third year’s aggregate terminal re¬ 
serve 

Number living 79,611 X $8,971, 
total fourth year’s premiums 
Fourth year aggregate initial reserve 
(terminal reserve plus new pre¬ 
miums) 

Interest on initial reserve 
Total fourth year’s insurance fund 
(initial reserve plus interest) 
Death claims to be deducted 
Balance at end of fourth year, 
aggregate terminal reserve 


$38,633.08403 

714,190.281 


752,823.366 

22,584.70098 

775,408.06698 

749,000 

26,408.06698 


Fifth Year: 

Fourth year’s aggregate terminal 
reserve 

Number living 78,862 X $8,971, 
total fifth year’s premiums 
Fifth year’s aggregate initial reserve , 
(terminal reserve plus new pre¬ 
miums) 

Interest on initial reserve 
Total fifth year’s insurance fund 
(initial reserve plus interest) 

Death claims to be deducted 
Fifth year’s deficit due to failure to 
use enough decimals 


26,408.06698 

707,471.002 

733>879-o689 

22,016.3720 

75 S* 895-4409 

756,000 

$104.56 


THE INDIVIDUAL TERMINAL RESERVE 


The individual terminal reserve— i. e. f the reserve per 
$1,000 of insurance, for a five-year-term policy, as 



NET LEVEL PREMIUM 183 

given in Flitcraft’s Life Insurance Manual and the 
Handy Guide , for a 3 per cent policy, age 35, are as 
follows: 

1st Yr. 2d Yr. 3d Yr. 4th Yr. 

$.30 $.4 6 . $.49 $.33 

These individual reserves can be found by taking 
the individual share of the aggregate terminal reserve 
calculated in proving the sufficiency of the five-year- 
term net annual level premium, as follows: 



Agg. 

No. Living 

Individual 

Yr. 

Terminal Res. 

End of Yr. 

Terminal Res 

1 

£24,045.916 

-f- 81,090 

= £.30 

2 

37,049.436 

-5- 80,353 

= .46 

3 

38,633.084 

79 . 6 11 

•49 

4 

26,408.066 

~T~ 78,862 

•33 


Of course, there can be no fifth-year individual 
reserve, as there is no terminal aggregate reserve at 
end of the fifth year. 

Cash values allowed on life-insurance policies are 
based on the individual terminal reserves. The reserves 
on term policies are so small, as can be seen from the 
above calculations, that most life-insurance companies 
do not grant any cash values in case of surrendered 
term policies. 

It should be noted that both the aggregate and the 
individual terminal reserves of term policies grow larger 
for a time, then diminish. In the above example, the 
individual terminal reserves for the four years are 
30 cents, 46 cents, 49 cents, and 33 cents, respectively. 



184 LIFE INSURANCE FUNDAMENTALS 

The terminal reserves for nine years on a three per cent 
ten-year-term policy are 76 cents, $1.41, $1.94, £2.31, 
$2.51, $2.52, $2.31, $1.85, $1.10, respectively. The 
reason for the increase, followed by a decrease, is obvious. 
The net level premium on the five-year-term policy, 
age 35, $8.97, is more than the net natural premium at 
age 35 (#8.69). The second year, age 36, the net 
natural premium is £8.81, still less than the level pre¬ 
mium of $8.97. In the third year, at age 37, both rates 
are identical, viz., $8.97. During the first two years, 
the level premiums provide more money than is needed, 
and the excess with interest earned constitutes the 
reserve fund. In the fourth year, the natural premium 
is $9.12, more than the level premium. The reserve is, 
therefore, drawn upon to make up the deficiency of 
the level premium. In the last year, the net natural 
premium is still higher—#9.30. The fifth year’s level 
premium, $8.97, plus the reserve of 33 cents amount to 
$9.30 at the beginning of the fifth year, age 39; $9.30 
is the amount of the natural premium for age 39, as 
given in many of the tables. In the one printed on 
page 148, the net natural premium for age 39 is $9.31. 
As a matter of fact, the exact figure is between $9.30 
and $9.31. The reserve quoted above, viz., 33 cents, 
is really deficient by a fraction of a cent. In practice, 
such deficiencies are offset by excess fractions of a cent 
at other ages. 


CHAPTER XIV 


ORDINARY LIFE NET PREMIUM AND RESERVES—AMOUNT 
AT RISK. LIMITED PAYMENT POLICIES—ENDOWMENT 

INSURANCE 

O RDINARY life is the name given to the whole- 
life policy with level premiums payable to age 95, 
inclusive. It is the most popular of all policies, for it 
provides permanent insurance at the lowest annual rate. 
The ordinary life net premium is computed in the same 
way as the net annual level premium for the five-year- 
term premium. We must first know the net single pre¬ 
mium of a whole life policy for $1,000. This is $419.88 
at age 35. Then, we must ascertain the single premium 
equivalent to an annual level premium of $1 payable 
for life at the same “rated age” 1 — i. e ., the present 
value of an annual level premium of $1 payable from 
age 35 to age 95. Finally, we divide the present value 
of the annual premium of $1 into $419.88, the net 
single premium of the whole-life insurance. 

The following table shows the computation of the 
present value of an annual level premium of $1 for 
whole life at age 35, based on the American Experience 
Table and 3 per cent interest. 


a The “rated age” is the age upon which the premium is based. This must 
not be confused with “rated up” age, which refers to rating an applicant 
at a higher age, because of some impairment. 

185 


186 LIFE INSURANCE FUNDAMENTALS 

Present Worth Amount of 




Number 


of $1 Due at 


Money Payable 



Surviving 


Beginning of 


First of 

Year 

Age 

Each Year 


Each Year 


Each Year 

i 

35 

81,822 

X 

1.000000 

= 

$81,822.00 

2 

36 

81,090 

X 

.970874 

= 

78,728.17 

3 

37 

8o,353 

X 

•942596 

= 

v 75*740-42 

4 

38 

79,611 

X 

.915142 

= 

72,855.37 

5 

39 

78,862 

X 

.888487 

= 

70,067.86 

6 

40 

78,106 

X 

.862609 

— 

67*374-94 

7 

4i 

77*341 

X 

.837484 

= 

64,771.85 

8 

42 

76,567 

X 

.813092 

= 

62,256.01 

9 

43 

75*782 

X 

.789409 

= 

59,822.99 

IO 

44 

74,98s 

X 

.766417 

= 

57*46977 

ii 

45 

74*173 

X 

.744094 

= 

55*191.68 

12 

46 

73*345 

X 

.722421 

= 

52,985.9 7 

13 

47 

72,497 

X 

.701380 

S3 

50,847.94 

14 

48 

71,627 

X 

.68095 1 

= 

48,774.47 

IS 

49 

7o,73i 

X 

.661118 

= 

46,761.53 

16 

50 

69,804 

X 

.641862 

= 

44*804.53 

17 

5i 

68,842 

X 

.623167 

= 

42,900.06 

l8 

52 

67,841 

X 

.605016 

= 

41,044.89 

19 

53 

66,797 

X 

•587395 

= 

39,236.22 

20 

54 

65,706 

X 

.570286 

= 

37*471-21 

21 

55 

64*563 

X 

•553676 

= 

35*746.98 

22 

56 

63,364 

X 

•537549 

= 

34,061.25 

23 

57 

62,104 

X 

.521892 

= 

32,411.64 

24 

58 

60,779 

X 

.506692 

= 

30,796.23 

25 

59 

59,38s 

X 

•491934 

ss 

29,213.50 

2 6 

60 

57,917 

X 

.477606 

= 

27,661.50 

27 

61 

56,371 

X 

•463695 

= 

26,138.95 

28 

62 

54*743 

X 

.450189 

= 

24,644.69 

29 

63 

53*030 

X 

•437077 

= 

23*178.19 

30 

64 

51*230 

X 

.424346 

= 

21,739.24 

31 

65 

49,341 

X 

.411987 

= 

20,327.85 

32 

66 

47,36 i 

X 

•399987 

= 

18,943.78 

33 

67 

45*291 

X 

•388337 

= 

17,588.17 

34 

68 

43*133 

X 

.377026 

= 

16,262.26 

3S 

69 

40,890 

X 

.366045 

= 

14,967.58 

36 

70 

38,569 

X 

•355383 

= 

13,70 6.76 

37 

71 

36,178 

X 

•345032 

= 

12,482.56 

38 

72 

33*730 

X 

•334983 

=3 

11,298.97 

39 

73 

3i»243 

X 

.325226 

3= 

10,161.03 

40 

74 

28,738 

X 

•315754 

= 

9,074.13 


ORDINARY LIFE NET PREMIUM 187 


41 

75 

26,237 

X 

•306557 

* 

$ 8 , 043.13 

42 

76 

23,761 

X 

.297628 

a* 

7 , 071.94 

43 

77 

21,330 

X 

.288959 

S 3 

6,16349 

44 

78 

18,961 

X 

.280543 

= 

5 * 319-37 

45 

79 

16,670 

X 

.272372 

as 

4 , 540.44 

46 

80 

14474 

X 

.264439 

= 

3>82749 

47 

81 

12,383 

X 

•256737 

= 

3 , 179.18 

48 

82 

10,419 

X 

.249259 

= 

2 , 597*03 

49 

83 

8,603 

X 

.241999 

= 

2,081.92 

50 

84 

6,955 

X 

.234950 

3 E 

1 , 634.07 

5 i 

85 

5 >485 

X 

.228107 

= 

I,25I.l6 

52 

86 

4*192 

X 

.221463 

= 

928.59 

53 

87 

3 >079 

X 

•215013 

= 

662.02 

54 

88 

2,146 

X 

.208750 

= 

447-97 

55 

89 

1,402 

X 

.202670 

= 

284.14 

56 

90 

847 

X 

.196767 

= 

166.66 

57 

9 i 

462 

X 

.191036 

= 

88.25 

58 

92 

216 

X 

.185472 

= 

40.06 

59 

93 

79 

X 

.180070 

= 

14.22 

60 

94 

21 

X 

.174825 

= 

3-67 

61 

95 

3 

X 

•169733 

= 

•50 


$1,629,678.44 


The sum of the present values of $1 payable by the survivors at the be¬ 
ginning of each year is $1,629,678.44. This sum divided by the number 
living at age 35, 81,822,gives us the little single premium which is equivalent 
to an annual level premium of $1, payable for life: 

$i,629,678.44^8i,822 = $I9.9I74=$i9.92 

Following the same process we used in finding the 
net annual level premium for a five-year-term insur¬ 
ance, we divide the whole-life net single premium at 
age 35 by the little single premium which is the equiv¬ 
alent of an annual level premium of $i payable for life 
from age 3 5: 

$419.88 -s- $19.92 = #21.08 = Whole-Life (Ordinary 
Life) net Annual Level Premium at Age 3 5 



188 LIFE INSURANCE FUNDAMENTALS 

SUFFICIENCY OF ORDINARY LIFE NET PREMIUM 

The table below proves the sufficiency of the net 
annual level premium of an insurance on the ordinary 
life plan. The student should follow each step succes¬ 
sively for the first two or three years. Then, while the 
progress of the table should be studied carefully, it 
will not be necessary to observe each step in detail from 
year to year. A thorough study of this table will serve 
to give the beginner an excellent idea of the principles 
on which an old-line life-insurance company operates in 
providing for payment of death claims over a long period 
of time; the collection of small premiums from large num¬ 
bers of people, the investment of funds at interest, the 
payment of death claims, and the maintaining of ade¬ 
quate reserves for many years are all well illustrated. 

One of the most valuable benefits to be gained from 
this study is the conviction that must come to the 
student that the system of life insurance is sound, that 
the life-insurance companies can guarantee their under¬ 
takings, that the net premiums charged are not only 
adequate, but also just. This table relates, of course, only 
to mortality costs. Provision for operating expenses 
is arranged for separately from the mortality, as will 
be explained later. 

PROOF OF THE SUFFICIENCY OF THE ORDINARY LIFE 

NET ANNUAL LEVEL PREMIUM, AGE 35. AMERICAN 
EXPERIENCE TABLE, 3 PER CENT. 

The net annual premium at age 35 is $21.08, but 
the figures in the table on pages 190 and 191 were 
obtained by using $21.081236 to age 86, $21,081 from 
87 to 92, and $21.08 from 93 to the end of the table. 


ORDINARY LIFE RESERVE 


189 


THE ORDINARY LIFE RESERVE 

The principle of the level premium is easily seen by 
studying the columns showing premium collections, 
death claims, and reserves. The premiums collected 
the first year amount to #1,724,908.89, exceeding the 
death claims by $992,908.89. In the twenty-second 
year the premiums collected amount to $1,335,791.44 
and the death claims total $1,260,000. This is the last 
year in which the death claims are less than the pre¬ 
miums collected. In the following year the premiums 
collected amount to $1,309,229.08, as against death 
claims of $1,325,000. 

The excess of premiums with interest earned has, 
of course, been held in reserve for the time when the 
annual death claims will be larger than the annual 
premiums collected— i. e., when the mortality rate and 
cost will pass the level of the level premium. In the 
meantime the excess of collections above death claims, 
together with the new premiums collected at the begin¬ 
ning of each year, have been earning large sums in 
interest, as shown in the interest column, and the 
reserve accumulations have been mounting to large 
totals. The interest becomes a considerable factor in 
the annual income of the company. After a few years 
the interest alone is sufficient to pay an important part 
of the year’s death claims. In the first few years the 
interest income is a small item as compared with the 
premium income, but after a while the interest be¬ 
gins to overtake the premium collections, eventually 
amounting to as much as one-third and one-half of 
the total premiums. Finally, in the latter years, 


190 LIFE INSURANCE FUNDAMENTALS 


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i 9 2 life insurance fundamentals 

the company’s annual income is divided' about equally 
between interest and premiums. 

Let us trace the progress of the reserve fund, the 
aggregate reserve. It grows constantly until the 
thirtieth year. After the death claims began to exceed 
the premium income in the twentieth year, the interest 
plus premiums kept the annual income above the death 
claims and added something to the reserve annually 
until the thirtieth year. Now the reserve begins to 
decline. Look at the income and disbursements for 
the thirtieth year: premiums, $1,079,991.72; interest, 
$806,517.06; total income, $1,886,508.78; death claims, 
$1,889,000. Prior to this year the total income, pre¬ 
miums plus interest, has exceeded the death claims. 
From now on the company draws out of its reserve 
fund enough money to make up the difference between 
each year’s death claims and income. The reserve is 
now gradually reduced until, finally, at age 95, it is 
exhausted, being required to complete the payment of 
$3,000 of death claims of the remaining three mem¬ 
bers of the original group. 

COMPARING SINGLE AND ANNUAL PREMIUM RESERVES. 

As has been previously stated, the reinsurance reserve 
is that amount of money which together with future 
premiums will be sufficient to meet future death claims 
(sufficient to reinsure the company). In order to be 
solvent a life-insurance company must not only have 
enough funds with which to pay all bills and business 
contracts it may have assumed, but it must also have 
an amount of reserve which, with interest at the assumed 
rate (3 per cent or 3F2 per cent) and the future net 


ORDINARY LIFE RESERVE 193 

premiums, will be equal to the amount of the future 
death claims. In auditing the books of a life-insurance 
company it is necessary to ascertain the amount of 
reserve that is required for future death claims, in order 
to determine whether or not the company’s invested 
funds are sufficient— i. e ., whether or not the company 
is solvent. In this connection, it is helpful to compare 
single premium reserves with annual premium reserves. 
The aggregate single-premium reserve is the present 
value of future death claims. 

Obviously, since on the net level-premium plan we 
expect to collect future annual net premiums, the amount 
held in reserve can be less than in case of the single¬ 
premium plan. Knowing exactly what net annual 
premiums are to be collected from our tabular group 
in the future, if we will, at any time, find the present 
value of such premiums and deduct it from the single¬ 
premium reserve at the same age, the difference, or 
balance, will be the total reserve required on the net 
annual level-premium basis. In short, the annual 
premium reserve may he defined as the difference between 
the present value of the future death claims and the present 
value of future annual net premiums. 

COMPARING INDIVIDUAL RESERVES 

The above statements apply not only to aggregate 
reserves, but also to individual reserves. At age 35, 
the net single premium, or reserve, of a whole-life 
policy is $419.88 (3 per cent). On an ordinary life 
policy (3 per cent) issued at age 30, the fifth year 
terminal reserve is $5573, when the policyholder is 35 
years old. The whole-life annual net premium, age 30, 


194 LIFE INSURANCE FUNDAMENTALS 

is $18.28. The annual premium terminal reserve, 
$55.73, should be the difference between the single¬ 
premium reserve, $419.88, and the present value of the 
annual premium, $18.28, payable every year from 
age 35 to age 95, inclusive. The present value of an 
annual net whole-life premium of $1 at the attained 
age, 35, is $19.92 (see page 187) and the present value 
of the annual premium, $18.28, payable from 35 to 95 is 
$18.28 X $19.92 =$364.14. $419.88—$364.14 =$55.74. 
This is one cent more than the reserve of $55.73, the 
difference being due to failure to carry the calculations 
out to a greater number of decimal places. 

THE ORDINARY LIFE INDIVIDUAL RESERVE 

As previously explained, the individual terminal re¬ 
serve is the quotient of the aggregate terminal reserve 
of a given year divided by the number of persons living 
at the end of the same year. In the ordinary life table 
on page 190, the first year (individual) terminal reserve 
of a $1,000 policy issued at age 35, is $12.88, and it is 
shown that this figure is obtained by dividing the 
aggregate reserve by the number living at the end of 
the first year (in the mortality table, it is the number 
living at 36 , which, of course, is the end of the year 
at age 35)— i. e., $1,044,656.16-s-81,090 =$12.88. In 
the same manner the individual terminal reserve per 
$1,000 of ordinary life insurance is calculated for all 
attained ages. It increases constantly until at age 
95 it is $949.79. No individual reserve is given for age 
96, for it is assumed that the three members of the 
group living at age 95 will die before attaining 96, so 
that the $3,000 composed of the aggregate terminal 


ORDINARY LIFE RESERVE 


i95 

reserve of $2,849.38 at age 95, the three net premiums 
of $63.24 (3X21.08) and interest of $87.38 is just 
enough to pay the three death claims of $1,000 each. 
Yet it should be noted that if any one of the three, 
or all three, should be alive at 96, the company would 
have on hand $1,000 for each survivor, which could and 
would be paid direct to the survivor himself as a cash 
value if he so desired. Because of this fact, the ordinary 
life policy is sometimes spoken of as an endowment 
policy maturing at age 96, an endowment policy being 
one which matures if the policyholder is alive at the 
end of an agreed term of years. 

THE AMOUNT AT RISK 

Referring again to our ordinary life reserve table on 
page 190, it should be noted that, although the amount 
of insurance payable at death at anytime is only $1,000, 
there is a considerable variation in the amount of the 
risk borne by the company. On the natural-premium 
plan, premiums for the year’s death claims only are 
collected at the beginning of the year, and each policy¬ 
holder of a given age pays an equal share of the death 
claims of the year. On the annual level-premium plan, 
each policyholder pays his share of the year’s death 
claims, but his level premium contains an excess for the 
purpose of building up the reserve that will pay the 
excess of future mortality over the level premium. 
When an individual dies, his beneficiary receives $1,000, 
which includes the reserve credited to his own policy. 
For example, if he insures at age 3 5 and dies the first 
year, since the death claim is theoretically due at the 
end of the year, the payment of $1,000 will include the 


196 LIFE INSURANCE FUNDAMENTALS 

terminal reserve of $12.88 credited to his policy; so 
that the payment consists of the reserve, $12.88, plus 
the sum of $987.12, which is really the amount of the 
company’s “loss,” although strictly we cannot speak 
of it as a loss, since the net premiums collected from 
the group fully provided for the payment of the $987.12, 
as well as for the establishment of the reserve of $12.88. 
If the policyholder dies in the twentieth year of his 
insurance when his policy reserve is $327.58, the amount 
of the company’s risk is only $672.42— i. e ., the differ¬ 
ence between $1,000 and the terminal reserve. This 
difference between the face amount of the policy and 
the terminal reserve, at any given time, is called the 
“amount at risk.” 

The actual “cost of insurance ” for a given year is 
based not on $1,000 of insurance, but on the amount at 
risk. For example, on the ordinary life policy issued 
at age 35, if the first year’s cost of insurance were based 
on $1,000, it would be the net natural-premium at age 
35, or $8.69 (3 per cent). But the cost of insurance is 
really $8.58, which is $987.12X8.69 — i. <?., the amount 
at risk multiplied by the net natural premium. 

The terminal reserve is often called “self insurance ” 
because it is that part of the death-claim payment 
which is made by the reserve built up by the policy¬ 
holder out of his own level premiums. 

It is interesting to compare the amount at risk on 
the ordinary life policy with the amount at risk on a 
single premium whole-life policy. The respective first 
year terminal reserves on policies issued at age 35 are 
$12.88 and $427.36. The respective amounts at risk 
are $987.12 and $572.64. 


LIMITED PREMIUM PLANS 


197 


THE LIMITED PAYMENT POLICY 

The single and annual premium (ordinary life) whole- 
life net premiums have been computed. Whole-life 
policies may also be paid for in a limited number of 
annual premiums, as ten, fifteen, twenty, twenty-five, 
thirty. One of the most popular of all the policies in 
use is the twenty-payment life policy. 

We shall compute the five-payment whole-life net 
premium, which will illustrate the principle involved in 
computing all limited-payment net premiums. The 
principle is really the same as that which was demon¬ 
strated in calculating the net annual level premium for 
a five-year-term policy and the ordinary life policy. 
There are two things we must know at the outset—the 
net single premium for the same kind of insurance at a 
given age and the present value of a premium (same 
age) of $1 payable annually for the desired number of 
years. In computing the net annual five-year-term 
premium at age 35 (3 per cent), we knew the net single 
premium for the same kind of insurance was $41.58, 
and we found that the present value of five annual 
premiums of $1 at the same age was $4,635 (really a 
single premium equivalent to the annual premium of 
$1) and we divided the first by the second—$41,584- 
$4,635 =$8.97, the net annual level five-year-term 
premium at age 35. In case of the ordinary life we 
found that the net single premium, age 35, was $419.88, 
and that the present value of annual premium of $1, 
payable from 35 to 95, inclusive, was $19.92, really a 
single premium equivalent to an ordinary life premium 
of $1. So we proceeded to divide $419.88 by $19.92 


i 9 8 LIFE INSURANCE FUNDAMENTALS 

and found that the ordinary life net premium for $1,000 
at. age 35 was $21.08. 

Now we want to compute limited payment premiums 
for whole-life policies. The policyholder is to be insured 
for life for $1,000, but he wants to pay, say, only five 
annual premiums. At age 35 the whole-life net single 
premium is $419.88. We found, in computing the five- 
year-term net annual level premium, that the present 
value, at age 35, of a five-year annual premium of $1 
was $4.635. Therefore, $419.88 4-$4,635 =$90.59, which 
is the five-payment net premium for a whole-life policy 
of $1,000, at age 35. The twenty-payment life policy 
is to be calculated in the same way. For age 35, divide 
the whole-life net single premium, $419.88, by $14,066, 
which is the present value, at age 35, of an annual 
premium of $1 payable for twenty years. The quotient, 
$29.85, is the twenty-payment life net premium at age 
35. Any limited-payment net premium may be found 
by the same process. 

ENDOWMENT INSURANCE 

Endowment insurance, as is generally known, pro¬ 
vides for a payment of money in either one of two 
alternative contingencies—if the policyholder dies before 
the end of a given period of years, or if he lives to the 
end of the period. Suppose a large group of men want 
to be insured in such a way that each one who lives 
to the end of five years will receive $1,000, and that 
$1,000 will be paid to the beneficiary of each one who 
dies before the end of the five years. Mr. M. Albert 
Linton, vice president and actuary of the Provident 
Life and Trust Company of Philadelphia, has published 


ENDOWMENT INSURANCE 199 

a sound and interesting analysis of the endowment 
insurance net premium to this effect: that, first, we take 
that sum which, paid annually at the beginning of each 
year for, say, five years, will at 3 per cent, or 3^ per cent, 
compound interest, equal $1,000 at the end of the 
period. This annual savings deposit with compound 
interest will produce a gradually increasing fund which 
will reach $1,000 at the end of the fifth year, thus 
providing for the endowment payment. The insurance 
premium, to provide $1,000 in case of death before the 
end of the five years, will be for a decreasing amount of 
term insurance . At the end of the first year there will 
be a certain accumulation from the savings deposit. If 
the policyholder dies, his beneficiary will have that 
much. But he wants her to have $1,000, so we shall 
add to the annual savings deposit the net premium for 
a one-year-term insurance for an amount equal to the 
difference between $1,000 and the savings fund already 
accumulated. In the second year the amount of the 
insurance will be less, as the savings accumulation will 
be larger. So the insurance diminishes yearly, as the 
savings or endowment fund grows. This explanation 
reveals a most valuable use of life insurance, viz., to guar¬ 
antee that the funds we hope to have, if we live long 
enough, will be paid to our beneficiaries, in case we don’t 
live to accumulate the amount expected and hoped for. 

Endowment insurance is in reality an insured savings 
plan, providing in the net premium an annual savings 
deposit which will accumulate to $1,000 at the end of 
a definite period and also a decreasing annual charge 
for insurance equal to the decreasing difference between 
$1,000 and the accumulated savings. 


200 LIFE INSURANCE FUNDAMENTALS 


SHORT COMPUTATION FOR ENDOWMENT PREMIUM 

The life-insurance agent should always have in mind 
and use with prospects Mr. Linton’s explanation of the 
endowment policy. Yet it is advisable to understand 
how endowment-insurance premiums are usually 
calculated. 

As the name endowment insurance indicates, the 
plan is a combination of an endowment, usually called 
pure endowment, and insurance on the term plan. 
Pure endowment is a plan by which the members of 
the group living at the beginning of a given period pay 
a single premium, or the members living at the begin¬ 
ning of each year during the period pay an annual 
premium, for the purpose of providing a definite amount 
say, $i,ooo, to be paid at the end of the period to the 
survivors only. Nothing will be paid to the beneficiaries 
of those who die before the end of the period. To 
obviate this undesirable condition, we add to the 
premium for a pure endowment of $1,000 a term 
insurance premium for $i,ooo. Thus we have an ideal 
condition. If the policyholder lives to the end of the 
period, he will receive $1,000. If he dies in the mean¬ 
time, his beneficiary will get $1,000. (This is exactly 
what is provided for in the explanation given by Mr. 
Linton, but the result is reached in a different way.) 
Already we have computed the net single premium of 
a $1,000 five-year-term insurance at age 35, viz., $41.58. 
We have only to find the net single premium for a five- 
year pure endowment and add it to the term single 
premium, in order to have the net single premium for 
a five-year endowment insurance. 


ENDOWMENT INSURANCE 201 

The first thing to do in computing a pure endowment 
premium is to learn how much money will be required 
to pay $1,000 to each survivor at the end of the period. 
From the American Table, we find that the number 
living at the end of the five-year period, starting at 
age 35 > 78> iq 6— i. e. y at attained age 40. Since each 
survivor at age 40 is to have $1,000, we shall require 
at the end of the five-year endowment period a fund 
of $78,106,000, the total endowment fund. As single 
premiums are to be collected at the beginning of the 
five years, our total premium fund must be that amount 
of money which at 3 per cent, or 3^ per cent, com¬ 
pound interest will amount to $78,106,000 five years 
later— i. e ., the premium fund must be the present 
value of $78,106,000 due five years hence at the assumed 
rate of interest. Let us use 3 per cent interest as in 
our other examples. The present value of $1 due five 
years hence at 3 per cent compound interest is $.862609. 
Therefore, $78,106,000 X $.862609 = $67,374,938,554 = 
the present value, or total net single premiums, for the 
five-year pure endowment at age 35. The individual 
net single premium will be $67,374,938,554 - 5 - 81,822, 
or $823.43. The five-year term insurance net single 
premium at age 35 is $41.58. The sum of $823.43 and 
$41.58 will provide a $1,000 endowment if the policy¬ 
holder lives to the end of the five years and $1,000 to 
his beneficiary if he dies in the meantime; $823.43 + 
$41.58 =$865.01, which is the net single premium for 
a five-year endowment insurance at age 35. 

To find the net annual level premium we have only 
to divide the net single premium of $865.01 by the 
present value of a five-year annual level premium of 


202 LIFE INSURANCE FUNDAMENTALS 


$i, at age 35, thus: $865.01 -4- 4.635 = $186.63 = net 
annual level premium for a five-year endowment insur¬ 
ance of $1,000 at age 35. Ten, fifteen, twenty, forty 
year endowment insurance premiums are computed in 
the same way. An endowment maturing at age 65 and 
issued at age 36 will be a twenty-nine-year endowment, 
premiums being computed as above. 

Endowment insurance reserves are to be calculated 
in the same way as the reserves on life policies. 


CHAPTER XV 

NONFORFEITURE VALUES—CASH AND LOAN VALUES—PAID- 
UP AND EXTENDED INSURANCE 

W HILE it is generally understood that most life- 
insurance policies may under certain conditions 
be surrendered to the companies issuing them for cash, 
the basis of cash values is not well understood, even 
by many life underwriters. 

From the preceding discussion of reserves even the 
beginner has probably seen that cash values are derived 
from the terminal reserves. It has been stated that the 
company must always hold as a reserve fund that sum 
which, with future interest and premiums, will pay future 
death claims. It follows, of course, that each individual 
policy must have to its credit its proper proportion of the 
total reserve fund— i. e ., the individual share of reserve, 
which is the sum that, with future interest to be earned 
by it at 3 per cent or 3^ per cent and the future premi¬ 
ums to be paid by the individual policyholder, will meet 
the policyholder’s share in the future death claims. 

Many people do not realize that the policy reserves 
held by a life-insurance company constitute a liability. 
Occasionally we meet some one who talks accusingly of 
the big sums of money accumulated by the life-insurance 
companies, as if they were great capitalistic enterprises 
waxing fat on the savings of thousands and thousands 
of poor people. The writer recently met such a person, 
a lawyer, graduated from one of the leading law schools 


203 


204 LIFE INSURANCE FUNDAMENTALS 

in the country. The answer to his criticism was just 
this: The great majority of the funds, or investments, 
held by the various life companies belong to the policy 
reserves, maintained for the purpose of paying, par¬ 
tially, the death claims of the future. The future pre¬ 
miums on policies already in force will not suffice to 
pay future death claims. If the companies should dis¬ 
burse their policy reserves to policyholders, they would 
be unable to meet their future death claims and would 
be insolvent; beneficiaries of policies would not receive 
the money which their husbands and fathers had in¬ 
tended to provide, when they had their lives insured. 
The reserves are liabilities for which the companies 
must give a strict accounting each year to the various 
states in which they write insurance. For example, the 
total assets of one of the American companies amounted 
to about $507,000,000 on December 31, 1921. The total 
liabilities amounted to about $482,000,000, of which 
about $432,000,000 was held for policy reserves and 
payment of incomes to beneficiaries. The objection 
occasionally raised to the large amount of funds held 
by life insurance companies is usually due to ignorance 
on the part of the objector. 

If, as has been stated, cash values are derived from 
the policy reserves, how can a company pay a cash value 
without violating the principle that the policy reserves 
must be maintained intact? If the company should 
grant a cash value to a certain policyholder and still 
assume to pay the amount of the policy when the 
policyholder died, it would, of course, violate the prin¬ 
ciple; but if the company “buys back” the policy from 
the policyholder with a part, or portion, of the reserve 


NONFORFEITURE VALUES 205 

credited to it, it is relieved of all liability. This is exactly 
what happens in allowing cash values. The policyholder 
surrenders, or “ sells,’' his policy to the company for a 
definite cash value established for each policy year on 
each kind of policy and for each age at which policies 
are issued, except that there are some policies (term) 
which usually have no cash values, and that as a rule 
no cash values are paid in the first year of insurance, 
and, in some cases, none in the second. 

Like the matter of loading, the question of how much 
of the reserve shall be paid as a cash value is a difficult 
one, and the opinions of experts differ, according to their 
various interpretations of theory, their own experience 
and observation, and certain questions of expediency. 
In the main, however, American life-insurance com¬ 
panies are extremely liberal in granting cash values. 

No company allows the full terminal reserve as a 
cash value 1 in the first year of insurance— i. e.> at the 
end of the first year (as the terminal reserve is the basis 
of the cash value, this value is always quoted for the 
end of the year). Indeed, until recently no company 
ever paid cash values on policies surrendered at the end 
of the first year. The reason for this practice is readily 
understood, if we remember that, in the first policy year 
the expenses for commissions, medical examination, risk 
inspection, writing and recording the policy, taxes, 
general new business expenses, etc., are far in excess of 
the loading, and that the full level premium companies 
must borrow from their surplus funds the amount 
necessary to make up the deficiency, on the assumption 

1 The full terminal reserve is allowed as a cash value under the War Risk 
Insurance policies. 



206 LIFE INSURANCE FUNDAMENTALS 

that the loan will be reimbursed out of the loadings of 
future years. If the policyholder quits at the end of 
the first year, the loan from the surplus fund to pay his 
initial expenses has not been reimbursed, and it is, 
therefore, only fair, in justice to other policyholders, 
that the first-year reserve, or at least a large part of it, 
should be retained by the company. 

It is the general practice of life-insurance companies 
not to allow the full terminal reserve as a cash value 
until after the policy has been in force for several years, 
commonly ten or fifteen years, sometimes longer. Dur¬ 
ing such period the cash value is fixed by deducting a 
certain amount each year from the reserve. This 
deduction, called the surrender charge , is made on a 
graduated scale, diminishing from year to year until it 
is entirely eliminated at the end of a certain period. 
For example, there are some companies that have a sur¬ 
render charge scale according to which, after the first 
year , in which no cash value is allowed , $10 per $1,000 of 
insurance is deducted from the terminal reserve in each 
year to the fifth, inclusive, the surrender charge being 
reduced in each succeeding year after the fifth by $i 
and being wholly eliminated in the fifteenth year, when 
the full terminal reserve is granted as a cash value, as 
illustrated in the following table: 


Terminal Reserves, 3 Per Cent, Ordinary Life Policy, Agb 35 


Year 

1 

2 

3 

4 

5 

Reserve. 

$12.88 
No C. V. 
No C. V. 

$26.13 

10.00 

16.13 

$39.76 

10.00 

29.76 

$53.77 

10.00 

43.77 

$68.16 

10.00 

58.16 

Sur. Charge... 
Cash Value... 


6 


7 


8 


$82.94 

9.00 

73.94 


$98.11 

8.00 

90.11 


$113.68 

7.00 

106.68 


Year 

9 

10 

11 

12 

13 

14 

15 

Reserve. 

$129.65 

$146.01 

$162.76 

$179.87 

$197.35 

$215.16 

$233.28 

Sur. Charge. 

6.00 

5.00 

4.00 

3.00 

2.00 

1.00 

0.00 

Cash Value. 

123.65 

141.01 

158.76 

176.87 

195.35 

214.16 

233.28 
































NONFORFEITURE VALUES 207 

On a given policy, say, ordinary life, all 3 per cent 
companies must hold exactly the same reserves for a 
given age. If, therefore, several 3% companies use the 
same surrender scale, such as the one described above, 
they will have the same cash values; otherwise they will 
not. This is also true for 3 %% companies. 

Another type of surrender charge is $10 after the first 
year and through the fifth year, with a reduction of $2 
in each successive year, the charge disappearing in the 
tenth year, as shown in the following table: 


Terminal Reserves, 3H Per Cent, Ordinary Life Policy, Age 35 


Yr. 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

Res. 

$11.76 

$23.91 

$36.45 

$49.39 

$62.73 

$76.49 

$90.67 

$105.27 

$120.31 

$135.76 

S. C. 

No C. V. 

10.00 

10.00 

10.00 

10.00 

8.00 

6.00 

4.00 

2.00 

0.00 

C. V. 

No C. V. 

$13.91 

$26.45 

$39.39 

$52.73 

$68.49 

$84.67 

$101.27 

$118.31 

$135.76 


If, in comparing with the above tables the cash values 
of companies having the same surrender charges, the 
student finds a discrepancy of a few cents, he should 
bear in mind that a good many companies quote cash 
values in dollars only, adding no cents. Thus, in the 
second table a company might quote a third-year cash 
value of $26.00 instead of $26.45. 

A reason has already been given why companies do 
not generally give any surrender value in the first year, 
but, rather, exact a surrender charge of 100 per cent of 
the reserve, viz., because the new policyholder does not 
pay his own initial expenses, which exceed the first-year 
loading, and the company has not been reimbursed for 
the loan from surplus, if he quits at the end of the first 
year. 

























208 LIFE INSURANCE FUNDAMENTALS 


SELECTION AGAINST THE COMPANY 

There are other reasons for exacting a surrender 
charge in case the policyholder quits within a certain 
number of years. It has long been believed by life- 
insurance officials that there is a natural tendency on 
the part of policyholders to exercise options that may 
be against the interests of the company. If policy¬ 
holders exercised their choice of alternatives without 
respect to the condition of their health, it is likely that 
the result of their selections would have no unfavorable 
effect on the company. But, as it is natural for policy¬ 
holders to take into account the state of their health 
in selecting one of two or more alternatives, there is 
always a possibility that the robust ones may decide 
one way, while those who are not well take another 
course. In the matter of cash values, for instance, it is 
possible that under the strain of hard times those policy¬ 
holders who were in good health would more readily 
surrender their policies than would those who knew, or 
felt, that they had become impaired in health. Many 
of the latter would be afraid to quit, because they would 
know that they might not be able to get life insurance 
again. If healthy persons should quit in large numbers, 
while very few of the impaired lives were withdrawn 
from the group, it is clear that the average level of 
health in tbe group would be lowered, the rate of mor¬ 
tality would probably rise and the company’s death 
losses would be increased. This tendency of the group 
to select options with unfavorable results to the company 
is known as “adverse selection” or “selection against 
the company.” 


NONFORFEITURE VALUES 209 

The surrender charge is a safeguard against adverse 
selection. If in a great emergency large numbers of 
policyholders should surrender their policies, the money 
saved in surrender charges would, partially at least, 
offset the increased cost of mortality resulting from 
their action. 


PROTECTING INVESTMENTS 

In such a panic time as that of 1907 large numbers of 
policyholders surrendered their policies, and huge 
demands were made upon the life-insurance companies 
for cash. Nowadays a good many companies are issuing 
policies, giving the company the right to defer cash 
values and loans for sixty to ninety days, but there are 
billions of dollars of life insurance still in force on which 
the cash value must be paid on demand. Life-insurance 
companies carry considerable cash balances in banks 
for the transaction of current business; ordinarily cash 
values are paid out of these regular balances. But in a 
panic, because of the demand for cash values and policy 
loans, the bank accounts are quickly drawn to a point 
beyond which they must not be lowered because of the 
needs of daily transactions of various sorts. Companies 
then decrease or eliminate new investments. Usually 
the premiums received daily from all over the country 
are invested as quickly as possible, so as to begin earning 
interest, but in the midst of an excessive demand for 
cash values and policy loans, the investment of premium 
receipts is reduced, or eliminated. The daily receipt of 
premiums may become inadequate, in which case 
companies may be forced to go into the market with 
their securities to get more money. They may even be 


210 LIFE INSURANCE FUNDAMENTALS 

obliged to sell some of their securities at a loss; for in 
such a crisis the security market would be low. The 
surrender charge serves, in such a situation, as an offset 
to losses on security prices. It is quite fair to the group 
of policyholders as a whole that those who are partly 
responsible for such a loss should help to make it good 
by sacrificing part of the terminal reserves on their 
policies in the form of a surrender charge. 

NEW SURRENDER METHODS 

A few years ago one or two companies adopted a plan 
by which they allow the full terminal reserves as cash 
values beginning with the third year, but no values are 
given in the first and second years. 

Also, a company introduced the practice of allowing 
a cash value the first year. Whereas it had formerly 
allowed no value in the first year, it now paid the first- 
year reserve less $10. For example, at age 35, ordinary 
life, 3 per cent, its first-year cash value is the reserve of 
$12.88—$10 =$2.88; on a twenty-year endowment, the 
first-year cash value is the terminal reserve of $34.59— 
$10 =$24.59. 

Recently another surrender plan has been adopted 
by one or two companies which exacts a surrender 
charge of $10 the first year and $5 the second year, the 
full reserve being paid beginning with the third year. 

Cash values and extended and paid-up insurance are 
commonly spoken of as nonforfeiture values, due to the 
fact that the laws of the several states provide for mini¬ 
mum values in order to protect the interests of policy¬ 
holders. Massachusetts was the first state to pass 
nonforfeiture laws. 


NONFORFEITURE VALUES 


211 


LOAN VALUES 

Life-insurance companies will usually lend money on 
the security of the policy at any time after payment of 
the annual premium required for the year in which 
a cash value is allowed for the first time— e . g., if the 
first cash value is allowed at the end of the second year, 
a loan may be obtained at any time after payment of 
the full annual premium required for the second year, 
provided always, of course, that the policy is in full 
force at the time the loan is desired. Details in regard 
to policy loans will be explained under the policy con¬ 
tract study given elsewhere in this book. 

EXTENDED AND PAID-UP INSURANCE 

If a policyholder decides to discontinue his insurance, 
but would like to have the company retain as a net 
single premium the cash value to which he is entitled, 
the company will grant either one or two forms of 
paid-up insurance, called “extended insurance” and 
“paid-up” insurance. Extended insurance is single 
premium, or paid-up, term insurance for the original 
amount; “paid-up” insurance is single premium, or 
paid-up, insurance of the same kind as the original 
policy, but of a reduced amount. 

In case of a 3 per cent ordinary life policy for $1,000 
issued at age 35 and having a cash value at the end of 
the tenth year amounting to $146.01, the amount of 
extended term insurance would be for $1,000 and it 
would run for such a term as $146.01 would pay for as 
a net single premium, viz., thirteen years and twenty-one 
days. Space does not permit the computation of the 



2i2 LIFE INSURANCE FUNDAMENTALS 


extended insurance. The paid-up insurance would be 
a whole-life insurance for such an amount as the cash 
value of $146.01 would buy as a net single premium, viz., 
$289. The computation of the paid-up insurance is 
quite simple. The ordinary life was issued at age 35 
and has been running for ten years, so that, at the end of 
the tenth year, the policyholder is 45 years old. From 
the table of 3 per cent net single premiums (page 173) 
we find that the whole-life net single premium for 
$1,000 at age 45 is $504.59. If the single premium, 
$504.59, will buy $1,000 of whole-life insurance at age 
45, then the cash value at age 45, $146.01, used as a 

146.01 

single premium, will buy“ o “~ of $1,000 = .289+ of 


$1,000 =$289; or it may be done this way—if $504.59 
buys $1,000, $1 will buy $1,000-^504.59 =$1.98 4-and 
$146.01 will buy 146.01 X$i. 98 =$2894-; or $504.59: 
$146.01 ::$i,ooo: x; x = $289. 



CHAPTER XVI 


OVERHEAD OR OPERATING EXPENSES—LOADING—GROSS 
PREMIUMS—PRELIMINARY TERM AND MODIFIED PRE¬ 
LIMINARY TERM—SELECT AND ULTIMATE METHOD 



HEN a manufacturer has figured the cost of pro- 


V V ducing an article, he adds the cost of overhead 
expenses as a necessary part of the selling price. The life- 
insurance company, in computing its net, or mortality, 
premiums, is figuring, as it were, the cost of production, 
simply the amount necessary to collect from each mem¬ 
ber of a large group for the service desired— i. <?., to pay 
#1,000 to the beneficiary of each person who dies within 
the prescribed period of his policy contract or to pay 
#1,000 to each holder of an endowment policy who sur¬ 
vives a specified endowment period. 

But there are operating, or overhead, expenses, and 
each #1,000 of insurance, or endowment, must be 
required to pay its own share of these costs. To the 
net premium is added, therefore, a sum for such expenses, 
the total amount being the gross premium quoted in 
the rate book. 

Past experience, of many years, has demonstrated 
that year in and year out, over a long period of time, 
the actual mortality has been well within the figures 
of the American Experience Table; the gross premiums 
actually charged have been sufficient to cover all 
expenses as well as mortality; companies have been 


214 LIFE insurance fundamentals 

able to earn their assumed interest rate and more. In 
the main their investments have been sound, and 
investment losses have been relatively insignificant. 
Yet, in predicting for the future, it is always wise to 
be “doubly” safe, to provide for unforeseen con¬ 
tingencies that may arise, like the influenza epidemic 
in 1918-19. This necessity is taken into account in 
fixing the charge that is to be added to the net 
premium. 

The amount so added is called the loading. The sum 
of the loading and the net premium is the gross premium. 
The loading is for the double purpose of paying 
operating expenses and providing a margin of safety in 
emergencies. 

There are few, if any, questions concerning which 
there is greater diversity of opinion than how to fix the 
proper amount of loading for different policies and 
different ages. This is one of the most difficult of the 
life-insurance companies’ problems and is too intricate 
for an extended discussion in such an elementary book 
as this one. It will suffice to point out some of the 
problems and to give a few examples of loading. 

One of the first difficulties is to provide money with 
which to pay the initial expenses of new insurance. 
The agent’s first commissions will run from 20 per cent 
to 50 per cent of the annual premiums, sometimes 
higher; the first commissions may average 45 per cent, 
sometimes more. Then there are expenses for the 
medical examination, usually five dollars, investigation 
of the habits and character of the applicant (known as 
the inspection of the risk), say, one dollar, taxes, and 
expenses for publicity, organization and supervision of 


EXPENSES AND LOADING 215 

agency forces, maintenance of the home office medical 
and agency staffs, which are chiefly engaged in connec¬ 
tion with securing new business. Each $1,000 of 
insurance must also bear its share of the general cost, 
including home-office salaries and expenses, taxes, etc. 
If, for example, the average annual gross premium is 
about $35, and the average policy about $3,000, the 
first year’s expense may average about $19 or $20. 

After the first year, annual expenses are much less. 
The renewal commission may average about $1.65 per 
$1,000 of insurance. There is no medical examination 
and no inspection. Premiums must be collected and 
recorded, and there are expenses incurred in connection 
with services of various kinds. In the various states 
annual taxes are levied on the premiums , and they have 
become a heavy , as well as unjust , burden on the 
policyholder , a penalty on thrift. Provision must also 
be made to pay for legal and other expenses in connec¬ 
tion with the settlement of death claims. There are 
also the general costs of the company, including home- 
office salaries and various other expenses. (Investment 
expenses are deducted from gross investment income 
and no provision need be made for them in the loading.) 

The problem is to provide for a very large first-year 
expense and a much smaller annual expense after the 
first year. The annual net premium is, of course, the 
same for every year— e. g ., $21.08 for an ordinary life 
policy at age 35 (3 per cent). If the addition of loading 
were made proportionate to the expenses in the various 
years, the loading would be very large the first year 
.and much smaller thereafter. To illustrate, we might 


216 LIFE INSURANCE FUNDAMENTALS 

policy at age 35 of, say, $21.08+$20 =$41.08, and a 
subsequent annual, or renewal, premium of, say, $21.08 
4-$3.50, or $24.58. But such a plan would not be 
popular, because of the high initial premiums, and it is 
practically certain that far less insurance would be 
written. The companies have, therefore, adopted a 
plan that is much more satisfactory to the public, viz., 
a level loading— i. e ., the same amount every year, 
much less than the first year’s expenses, but more than 
the subsequent annual expenses, just the reverse of the 
net level premium, which is larger than is necessary in 
the earlier years, but smaller than the actual mortality 
cost in the later years. 

We may illustrate the loading by comparing the 
gross premiums of a certain participating 3 per cent 
company with the net premiums, age 35, for ordinary 
and twenty-payment life and twenty-year endowment. 

Gross Pr. Net Pr. Loading 


0 . L. $26.35 $21.08 $5*27 

20 P. L. 36.22 29.85 6.37 

20-year End. 49*85 41.97 7.88 


As the loading is much less than the first year’s 
expenses, how do companies meet them. Companies 
operating on the full level-premium basis, which we 
have been studying in the preceding pages, borrow, not 
from banks or outside sources, but from a surplus fund 
which they maintain. (We shall presently discuss the 
general purpose and source of the surplus fund.) If the 
first-year expense is, for example, $20 and the loading 
is only $6, the difference of $14 is borrowed from 
surplus and will be reimbursed to the surplus fund out 





EXPENSES AND LOADING 21 7 

of the future loadings, which usually exceed 1 the 
future annual expenses. The student will readily see, 
therefore, that a company will be limited in the amount 
of new business which it may write in a given year by 
the amount which it may safely borrow from its surplus 
fund for meeting the excess of the first-year cost over 
the first year's loading. 

GROSS PREMIUM DIFFERENCES DUE CHIEFLY TO 
DIFFERENT LOADINGS 

One of the things that puzzles most beginners is the 
differences found in the gross premiums used by various 
companies. It is inevitable that there should be certain 
differences. Even from the brief discussion above, it is 
readily seen that the problem of providing for expenses 
of the future, which cannot be so scientifically predicted 
as can the rate of mortality, is a difficult one. The cost 
of paper and printing, rent, salaries, and other things, 
may unexpectedly rise to abnormal heights as they did 
during the war. And they may never recede to the old 
basis. Mortality rose abnormally during the influenza 
epidemic of 1918-19, but it receded to a very low point, 
re-establishing or maintaining the usual level, or aver¬ 
age, of mortality. The mortality table holds good 
despite the “du”; but it is more difficult to find a basis 
of agreement among the companies for the prediction of 
future expenses. Fortunately, a general rise in costs is 
usually accompanied by a rise in interest rates. 

Opinions naturally differ as to the best methods of 

1 Except for some nonparticipating premiums which have a very small 
loading, in which case expenses are largely provided for by annual savings 
in mortality and gains in interest, as will be explained. 




218 LIFE INSURANCE FUNDAMENTALS 

fixing the loading, and different methods are adopted, 
with the result that we have different gross premium 
rates. The following comparison of gross premiums of 
two well-known companies is interesting: 


AGE 35 


Policy 

3 Per Cent 
Net 

Premiums 

Gross Premiums 

Loading 

Co. A 

Co. B 

Co. A 

Co. B 

0. L. 

£21.08 

£26.35 

£26.35 

£5.27 

$ 5-27 

20 P. L. 

29.85 

35-82 

36.22 

5-97 

6.37 

20-Year End... 

41-97 

50.36 

49.85 

8-39 

7.88 


Of course, there is also a difference in net premiums 
for 3 per cent and 3 % per cent companies, so that with 
the same amount or the same percentage for loading a 
3 per cent gross premium will be larger than a 3per 
cent gross premium for the same age and policy. For 
example, the 3 per cent and 3 % per cent net ordinary 
life premiums at age 35 are $21.08 and $19.91, 
respectively. 

The two 3 per cent companies compared in the above 
table differ slightly in rates. In the above illustration, at 
age 35) the ordinary life rates are the same, Company A’s 
twenty-payment life rate is less than Company B's, but 
its twenty-year-endowment rate is higher. While it is 
not the province of this book to discuss the various 
methods of loading most commonly used, it is perhaps 
advisable to show the two methods employed in fixing 
the two sets of gross premiums given in the above table. 

Companies A and B both add a loading of 25 per cent 
of the ordinary life net premiums and, therefore, have 
the same gross premiums on this plan. 



















EXPENSES AND LOADING 219 

Company A adds a loading of 20 per cent of its 
twenty-payment life net premium and has a gross 
twenty-payment life rate of #35.82, while Company B 
determines its twenty-payment life loading as follows: 
It takes 12^2 per cent of the ordinary life net premium 
at the same age and adds 12^2 per cent of the twenty- 
payment life net premium, thus: 12^2 per cent of 
#21.08 =#2.635; I2 ^2 per cent of#29.85 =#373; #2.635 *+• 
$ 3-73 =£6.37; #6.37+#29.85 =#36.22. 

In arriving at their twenty-year-endowment insur¬ 
ance gross premiums, both companies use the same 
methods which they used for twenty-payment life 
premiums. A adds to the net premium 20 per cent— 
20 per cent of #41.97 =#8.39+#41.97 =#50.36. B takes 
12^ per cent of the ordinary life net premium and 
12^2 per cent of the twenty-year-endowment net 
premium: 12^+ per cent of #21.08 =#2.635; l2l A P er 
cent of #41.97 =#5.246; #2.635+#5.426 =#7.88; #7.88 
+#41.97 =#49.85. 

On a given plan of insurance the loadings must 
increase as the age increases, since commissions and 
taxes are higher on the larger premiums at older ages. 
Either of the percentage methods described above will 
accomplish this result— e. g., if we load all 3 per cent 
ordinary life premiums 25 per cent, the loading on the 
net premium #21.08, at age 35, is #5.27, while it is 
#14.56 on the net premium of #58.27 at age 60. This 
difference is justified; for the company has found that 
the most satisfactory way to compensate the agent is 
to allow a percentage on a given policy at all ages, and 
it pays, say, 50 per cent of the gross premiums of #26.3 5 
and #72.83, respectively, as first commissions, viz., 


220 LIFE INSURANCE FUNDAMENTALS 

$13.17 and $36.42; also taxes are levied on the 
premiums. 

But all expenses do not increase with the size of the 
premium. Some are the same for every $1,000 of 
insurance, regardless of plan or age, as, for example, 
general home-office expenses. Such considerations give 
rise to other methods of establishing the loading, which 
lack of space makes it impossible to discuss here. 

PRELIMINARY TERM PLAN FOR MEETING FIRST 

YEAR EXPENSES 

The necessity of borrowing from surplus such large 
sums for first-year expenses is avoided, and the collec¬ 
tion from the new policyholder of a satisfactory amount 
for his own first year expenses is accomplished, by those 
companies which use the full, or the modified, prelimi¬ 
nary term method (of valuing reserves). 

The net level premium system which has been de¬ 
scribed in the preceding pages is called the full net level 
premium plan. Under this plan the net level premium 
for an ordinary life policy (3 per cent) issued to a person 
35 years old is based on the whole-life plan beginning at 
age J5, resulting , as we know , from the very first year , in 
the establishment of a terminal reserve of $12.88. The 
first-year ordinary life (3 per cent) terminal reserve for 
rated 1 ages 45, 55, and 65 are, respectively, $19.61, 
$28.87, $39-87. If a company could collect approxi¬ 
mately the same gross premium as would be collected 
under the full net level premium plan, but could be 
relieved of the necessity of putting up these first-year 
terminal reserves, it would have a source of funds for 

1 Rated age is the age for which the policy is issued. 


PRELIMINARY TERM 221 

first-year expenses without having to maintain a large 
surplus for this purpose, and the new policyholder 
would pay his own entrance costs when he became a 
member of the insured group. That was the idea from 
which the preliminary term method was evolved. 

If the insurance was to start at age 35, but no 
terminal reserve was to be required the first year, it is 
obvious that the first year’s insurance could not be on 
the whole-life plan; it could not be ordinary life. Under 
the preliminary term plan, the first year’s insurance 
was, therefore, made one-year term insurance, and the 
ordinary life insurance was made to begin one year 
later, at age 36. With this combination, there could 
not be a full net level premium, for the net level pre¬ 
mium of the ordinary life would start at age 36, based 
on age 36, and the net premium of the first year would 
be the net natural, or one-year term, premium based 
on age 35. 

Thus, the preliminary term ordinary life policy, age 
35, is a one-year term insurance with a net premium 
of $8.69 (3 per cent), followed by an ordinary life 
insurance at age 36, with a net level premium of #21.74 
(3 per cent) as compared with the net level ordinary 
life premium at age 35 of #21.08. With a gross premium 
of, say, #26.88, the loading the first year would be 
#26.88—#8.69, or #18.19, whereas with the same gross 
premium on the full level premium plan the loading in 
the first and subsequent years would have been #26.88— 
#21.08, or #5.80. After the first year the preliminary 
term plan would have a loading of #26.88—#21.74, or 
#5.14. In short, the preliminary term plan has a much 
larger loading the first year than the full net level 


222 LIFE INSURANCE FUNDAMENTALS 

premium plan, but in the second and following years 
the loading is less on the preliminary term plan. 

The two principal forms of the preliminary term are 
known as the full preliminary term method and the 
modified preliminary term method. The former is open 
to certain objections; the latter was devised as a means 
of overcoming the chief objections and is widely used 
in the United States. The full preliminary term plan 
is still allowed in a few states. 

The most serious objection to the full preliminary 
term plan is that it allows an excessive amount of load¬ 
ing on certain limited payment life plans and on short¬ 
term endowments and limited payment endowments. 

The following table illustrates the excessive loadings 
of the full preliminary term plan: 


Loadings Compared at Age 35 on Full P. T. Plan and Full Net 

Lev. Prem. Plan 


First-Year Loadings, Full P. T. Plan 

Loadings, 

Policy 

Gross 

Net Nat. 

First-Year 

Full Lev. 

Premium 

Premium 

Loading 

Prem. Plan 

0 . L. 

$26.88 

8.69 

$18.19 

$5.80 

20 P. L. 

36.85 

8.69 

28.16 

7.00 

20-Year End. 

SO.64 

8.69 

41-95 

8.67 

10-Year End. 

104.48 

8.69 

95-79 

15.18 


It is readily seen that on the twenty-year and ten-year 
endowment policies the first-year loadings are excessive. 
It would seem wise to correct this mistake by using a 
portion of these premiums to establish a certain first- 
year reserve. This is actually done in the modified 
preliminary term plan by limiting the amount of the 
first-year loading to the amount of loading obtained 
under one of the lower-premium policies—either the 
ordinary life or the twenty-payment life. If the ordinary 


















PRELIMINARY TERM 223 

life were adopted as the limiting standard, the loadings 
on all plans having higher premium rates than the 
ordinary life would be the same as for ordinary life 
policies for the same ages. In the table given above for 
age 35> t ^ ie loading of the twenty-payment life on the 
preliminary term plan is $28.16. This amount should 
be ample for first-year expenses on higher-premium 
policies. In some states the companies using the modi¬ 
fied preliminary term plan are allowed to use the 
twenty-payment life for fixing the maximum limit of 
loading. On policies whose premiums are in excess of 
the limit policy, the margin left, after deducting the 
sum of the twenty-payment, or ordinary life, loading 
and the net natural premium, is used for the purpose 
of establishing a reserve. 

Another objection to the preliminary term plan, as 
has already been mentioned, is that the reserve is 
permanently less than it would have been had the 
policy been established at the time of issue, say, age 35, 
on the full net level premium basis, instead of one year 
later, at age 36. The first reserve on the full preliminary 
term plan would be the terminal reserve for rated age 
36, at which time there would have been a second year’s 
terminal reserve for rated age 35—only $13.42 instead 
of $26.13. A further comparison is given in the table 
below: 


Comparison of Reserves on P. T. Policy with Net Level Prem. Reserves. 
Rated Age 35, Ordinary Like, 3 Per Cent 


Year. 

1 

10 

20 

30 

40 

50 

60 

61 

Age Attained. . 

35 

45 

55 

65 

75 

85 

95 

96 

N. L. P. Res_ 

$12.88 

$146.01 

$327.58 

$522.92 

$698.21 

$844.01 

$949.79 

$1,000.00 

Full P. T. Res.. 

00.00 

134.86 

318.81 

516.69 

694.28 

841.97 

949.14 

1,000.00 

Difference. 

$12.88 

$11.15 

$8.77 

$6.23 

$3.93 

$2.04 

$0.65 

$000.00 

































224 LIFE INSURANCE FUNDAMENTALS 

The difference in reserves is considerable at the begin¬ 
ning and diminishes gradually, but the preliminary 
term reserve does not overtake the full net level 
premium reserve until age 96. 

There is also the problem of adjusting the limited- 
payment policies and endowment policies under the 
preliminary term plans. These are arranged as follows: 
A twenty-payment life policy is composed of a one-year 
term insurance based on the rated age, say 35, and a 
nineteen-payment whole-life insurance based on at¬ 
tained age one year older, 36. A twenty-year-endow¬ 
ment policy would be a one-year term insurance at age 
35 plus a nineteen-year-endowment insurance based on 
attained age one year older, 36. 

Up until quite recent years there has always been a 
more or less irreconcilable difference of opinion between 
those persons advocating the full net level premium 
system and the modified preliminary term plan (neither 
school approves full preliminary term). Within the 
past few years, however, these differences of opinion 
have become reconciled to a certain degree. Some 
states which previously excluded companies using the 
modified plan have at last admitted them and efforts 
are being made, with the sanction of officials of full net 
level premium companies, to secure recognition of the 
modified plan in other states. One of the interesting 
results of the modified plan is that a company is not 
so limited, as under the full level premium plan, in 
the amount of new business it may write, because of 
borrowing large amounts from surplus. It sometimes 
happens that a full level premium company must stop 
writing new business because it seems unwise to reduce 


SELECT AND ULTIMATE 225 

the surplus further, or because the legal minimum of 
surplus has been reached. 

THE SELECT AND ULTIMATE PLAN 

Another important method of providing for first-year 
expenses is called the select and ultimate method (of 
valuing reserves). Here again the purpose is to avoid 
establishing the full net level premium reserves in the 
beginning. However, the full reserve is established by 
the end of the fifth year of insurance, being less than the 
full reserve during the preceding years and thus afford¬ 
ing a fund, in addition to the regular loading, for first- 
year expenses. Under this plan, the permanent insur¬ 
ance is based on the net premiums for the rated age 
and not one year later; the first year is not one-year 
term insurance. 

The select and ultimate method is based upon the 
mortality savings during the first five years of insurance. 
It has already been stated that, because of careful 
medical selection, the actual mortality of life-insurance 
companies is less than that assumed in the American 
Experience Table, especially during the first few years. 
The mortality being less than the expected, it is not 
absolutely necessary, to maintain the full reserve during 
the early years nor to set aside for mortality purposes 
the entire net premiums collected in the beginning. 

It is assumed, under this plan, that the mortality of 
the first five years will be, respectively, 50 per cent, 
65 per cent, 75 per cent, 85 per cent, and 95 per cent 
of the American Table, as the result of careful selection y 
but that ultimately (to be safe, say, beginning with the 
sixth year) it will be equal to that of the table. Under 


226 LIFE INSURANCE FUNDAMENTALS 

this assumption there would be during the five years, 
respectively, mortality savings of 50 per cent, 35 per 
cent, 25 per cent, 15 per cent, and 5 per cent of the 
expected. The present value of the savings in mortality 
on this basis can be deducted from the net premiums 
and used the first year, together with the loading, for 
initial expenses. It will not be necessary to reimburse 
the money taken from the net premiums, in order to 
provide for the full tabular mortality, because experi¬ 
ence has shown that during these five years, on the 
average, the actual mortality will be even less than is 
assumed in the select and ultimate table. That portion 
of the full net level premium remaining after the deduc¬ 
tion of the present value of the assumed five years’ 
savings and the first year’s cost of insurance is used to 
establish a first-year reserve. Beginning with the second 
year the full net level premium, based on the rated age, 
is used only for mortality, and is sufficient with the 
reserve already established in the first year, to bring 
the fifth-year reserve up to the amount of the full net 
level premium reserve. 


Comparing Reserves on the Net Level Premium and S. & U. Plans 
Ordinary Life, Age 35, Net Premium $21.08 (3 Per Cent) 



First 

Year 

Second 

Year 

Third 

Year 

Fourth 

Year 

Fifth 

Year 

N. L. P. 

$12.88 

$26.13 

$39.76 

# 53-77 

$68.16 


S. & U. 

6.19 

22.32 

38.04 

53-33 

68.16 


Difference. 

$6.69 

$3-8i 

$172 

$0.44 

$00.00 


The state of New York, whose life-insurance laws are 
among the most stringent in the country, allows com- 





























SELECT AND ULTIMATE 227 

panies operating in the state to spend for first-year 
expenses, in addition to the loading, the present value 
of the mortality savings as computed by the select and 
ultimate plan. 





CHAPTER XVII 

SURPLUS AND “DIVIDENDS” 

R EFERENCE to surplus has already been made. In 
. general business the word surplus has two uses: it 
may indicate what is left over from the year’s income 
after all the expenses of the business for the fiscal year 
have been paid, or it may refer to a fund accumulated 
from annual surplus earnings and held for emergency 
purposes. For example, banks accumulate such funds 
and advertise them as an evidence of financial strength. 
The bank that has a large surplus fund is in a secure 
position, because the bank holds more money than is 
necessary to pay its depositors. On an occasion of 
excessive withdrawls by depositors in a depression of 
investment values or in case of loss, the bank would, 
by reason of an adequate surplus, be in far less danger 
of inability to meet its liabilities. But if the bank 
carried no surplus funds, and had only the money of 
depositors, in various investments, there might be 
financial losses, in a year of business panic, which 
would make it insolvent. 

If you were planning a trip to Europe and were 
estimating the expenses of the trip, after you had 
itemized amounts to be spent for steamship tickets, 
railroad fares, hotel and restaurant bills, cab fares, tips, 
incidental expenses, and, perhaps, gifts for the folks at 
home, you would, if you were wise, add to your carefully 

228 


SURPLUS AND “DIVIDENDS” 


229 

made estimate a surplus amount for unexpected needs. 
When you completed the trip, you might find that your 
estimates had been liberal and that by economy you 
had not only avoided spending more than you had 
planned, but had even saved some of the money you 
thought you might have to spend. Thus you would 
have on hand the excess amount you had provided for 
any unexpected expenses plus the saving you had 
effected by economy. 

On the other hand, you might have had some un¬ 
fortunate, or, at least, unexpected, experiences which 
necessitated your spending more than you had esti¬ 
mated—for example, you might have been ill, or you 
might have lost valuable railroad tickets, in which case 
you would have been obliged to spend some of the 
surplus fund you had included in the letter of credit 
you purchased before leaving the United States. If you 
had not included such a surplus, over and above your 
estimated expenses, you might have been “stranded” 
in Europe, as others have sometimes been stranded. 

Moreover, if your estimate of the expenses of the trip 
had been based on incorrect information as to travel 
needs and costs, or if you had attempted to figure too 
“close,” you might have been obliged to cut into your 
surplus funds. 

A life-insurance company, in fixing its net, or mor¬ 
tality, premiums with which to pay expected death 
claims and its loadings from which to pay various 
operating expenses, must use very great care. The net 
premiums must be adequate for the risk involved and 
the loading must be ample 1 for estimated expenses. 

»In mutual companies; but not necessarily so in stock companies. 



230 LIFE INSURANCE FUNDAMENTALS 

Moreover, the company must carry a surplus fund 
which may be drawn upon in case the net premiums or 
the loadings prove insufficient in some great emergency. 
The influenza of 1918-19 and the extremely high costs 
of business operations during the World War placed an 
unprecedented strain upon the finances of the life- 
insurance companies; but their adequate rates plus 
their surplus enabled them to pass through these trying 
experiences not only solvent, but in sound condition. 

Having computed ample premiums for mortality and 
expenses, life-insurance companies then proceed to 
exercise care in selecting the risks they are to insure 
and economy in their expenses, so that, in normal 
times, their death claims are less than are provided for 
in the net premiums based on the death rates of the 
American Experience Table, and their expenses are 
less than were estimated in fixing their loadings. Thus 
a saving is effected in mortality and expenses, or load¬ 
ings. Also, in computing their net premiums the 
companies have assumed that only 3 per cent or 3 yi 
per cent would be earned, and, therefore, they need 
to earn only 3 per cent or 3^ per cent in order to have 
the required interest which, together with the net 
premiums paid by policyholders, will meet the esti¬ 
mated death claims; but actually the companies earn 
more than 3 per cent or 3^ per cent and make a profit 
or gain in interest. 

To illustrate mortality savings in a very simple way, 
let us assume that a new company insures 81,822 per¬ 
sons for $1,000 each at age 35 on the ordinary life plan, 
and that all of them have paid their first premium. The 
number of deaths expected during the first year, accord- 


SURPLUS AND “DIVIDENDS” 


231 

ing to the American Experience Table of Mortality, is 
732, so that the expected death claims are $732,000. 
But let us assume that the company has selected its 
risks by medical examination so carefully that none of 
the 81,822 persons showed any serious physical impair¬ 
ment at the time they were insured, and that, as a 
result, only 432 persons died in the first year. Thus, 
instead of paying out $732,000 in death claims the 
company has to pay only $432,000. How much does 
the mortality saving amount to? 

Assuming the death claims to be paid at the end of 
the year, there would be a terminal reserve, or self- 
insurance, on each $1,000 policy amounting to $12.88. 
Each $1,000 paid as a death claim would consist of the 
reserve of $12.88 and $987.12, which is the amount at 
risk. In the case of the 300 who have not died, the 
company has indeed been spared the necessity of dis¬ 
bursing $1,000 per person, but it has actually saved 
(i. e., released from all liability for future death claims) 
only $987.12 per person; for the terminal reserve of 
$12.88 must be maintained for each of the 300 who 
survive at the end of the first year. If the company 
did not maintain the terminal reserve of $12.88 for 
each of the 300 persons who survive, it would be 
insolvent, because, in order to pay the future expected 
death claims, the company must collect future net 
premiums, must hold the reserve on each policy , and must 
earn interest at 3 per cent. None of these three items 
can be dispensed with. 

The company’s mortality saving for the year is 300 X 
$987.12 =$296,136. 

“But,” some one may ask, “is this money actually 


232 LIFE INSURANCE FUNDAMENTALS 

saved? Those 300 persons will die some day. Must 
we not hold this $296,136 at interest so as to be able 
to pay their claims when they finally die ? ” l The easiest 
answer to this question is the definition of the reserve: 
that sum of money which together with future net 
premiums and the assumed rate of interest will pay 
future death claims. If we hold the reserve of $12.88 
for each person surviving in the group and collect from 
each one the net premiums as they become due and 
earn 3 per cent interest in each year, we can pay 
future death claims. 

As this point is commonly a difficult one for the 
average beginner to grasp, we shall give a homely 
illustration: Suppose that on the last day of the year— 
assuming our death claims are to be paid at the end of 
the year—the company’s treasurer drew a check for 
the amount of the expected death claims, $732,000 and 
deposited it in a special bank account; that he then 
drew upon this special account a check for $1,000 to be 
sent to the beneficiary of each of the 432 persons who 
died; there would remain $300,000 in the account. 
Suppose, then, that the actuary of the company should 
notify the treasurer that, as there were 300 more sur¬ 
vivors than were expected, the company must have 
back the amount of the terminal reserve for each of 
300 $1,000 policies, and that the treasurer then checked 
out of the special account, to the order of the company, 
300 X$i2.88, or $3,864.00. All present requirements 
for the future would be complied with without touching 
the bank balance of $296,136 in the special account. 

1 An especially favorable mortality experience may, however, be followed 
by a heavier death rate, with smaller mortality savings. 


SURPLUS AND “DIVIDENDS” 


233 

This balance could be lost or spent or distributed among 
all the surviving policyholders, or held in a special 
surplus fund without impairing the company’s solvency. 
Funds saved by favorable mortality experience in any year 
constitute surplus for the current year , money left over 
after the payment of mortality obligations. 

Again, suppose that this imaginary company’s total 
gross premiums, collected for the year, provide $450,000 
for estimated expenses of all sorts, including salaries, 
commissions, rents, medical fees, printing and sta¬ 
tionery, traveling expenses, postage, new furniture, and 
many other items, but that, by economy, the company 
keeps the year’s expenses down to a total of $400,000. 
It has saved $50,000 out of its loadings, and this amount 
is surplus for the current year. 

The company has assumed that it would earn 3 per 
cent interest, on the average, on its investments, but 
by employing investment experts it has secured high- 
grade securities which earned on the average 4.9 per 
cent net. Only 3 per cent of the 4.9 per cent is needed for 
addition to the mortality funds, so that the company 
has a gain of 1.9 per cent over the required interest. If 
the new company in our illustration collected net 
premiums of about $1,700,000, 1.9 per cent of this 
amount would be $32,300, and this sum would belong to 
the current year s surplus. 

The three chief sources of surplus are (1) savings in 
mortality, (2) savings in expenses, (3) gains in interest. 

Perhaps in the course of the year our hypothetical 
company sold some securities and put the proceeds into 
other investments. Suppose that a profit of $20,000 
were made in this way; this would also be a part of 


234 LIFE INSURANCE FUNDAMENTALS 

the current year’s surplus, assuming that all death 
claims and expenses had been paid, and that an average 
of at least 3 per cent interest had been earned on all the 
company’s mortality funds. 

Any funds received or saved during the year over 
and above the actual death claims and other disburse¬ 
ments belong to the current year’s surplus. For example, 
in our hypothetical company no cash values are allowed 
at the end of the first year. If about 10 per cent, say, 
8,000 of the policyholders failed to pay their second 
year’s premiums, there would be added to the current 
surplus 8,000X^12.88 (the amount of the individual 
terminal reserve) a total of $103,040. However, this 
sum must not be considered as a profit; it is rather a 
reimbursement of money advanced by the company for 
the excess of first year’s expenses on the 8,000 policies 
above the loadings collected. 

What is done with the current year’s surplus? The 
company maintains a permanent surplus fund, com¬ 
monly called "the surplus,” but referred to in the 
company’s annual statement, as "unassigned funds”— 
that is, funds not assigned as a special provision for any 
particular liability, such as reserves for death claims, 
annuities, endowments, disability annuities, and de¬ 
ferred payments to beneficiaries. "The surplus” is 
really nothing more or less than an emergency fund. 
Ordinarily, due to medical selection, the death rate is 
considerably below that of the American Table; but 
in the great influenza epidemic life-insurance policy¬ 
holders died at an unprecedented rate. In a few 
companies the actual death claims exceeded those 
expected by the table; those claims in excess of the 


SURPLUS AND “DIVIDENDS” 


235 

tabular amount were not provided for in the reserves 
and net premiums. Here was an emergency for which 
these companies were fully prepared, so that there was 
no alarm and no catastrophe. The surplus fund had 
been accumulated for just such an emergency and was 
drawn upon; and the excess death claims were 
promptly paid without any impairment of the com¬ 
panies’ solvency. No more convincing evidence could 
be given as to the stability of the system of the “old 
line” system of life insurance than the instance just 
cited. It will be rare, indeed, that the life-insurance 
companies will be called upon to meet such a severe 
test as the epidemic of 1918-19. 

Life-insurance companies, like other conservative 
financial institutions, have occasional investment losses. 
If they carried no surplus— i. e ., funds assigned to no 
definite liabilities—an investment loss would impair 
the reserves and the company would be insolvent; but 
if a company should lose, say, #10,000 or #100,000, the 
loss would fall upon the surplus and not upon the 
reserves. 

The surplus is an additional margin of safety. It is 
a wall of protection between the reserves and various 
dangers. The legal reserve system of life insurance is 
wonderfully secure, with its proven mortality table, its 
low assumed interest rate, and its scientific methods of 
selecting risks, the conservative methods of manage¬ 
ment, and state supervision; yet it adds another factor 
of safety, the surplus. 

When the current year’s surplus is known, a large, 
or small, portion of it, as may be necessary, is added 
to “the surplus,” or “unassigned funds.” In a mutual 


236 LIFE INSURANCE FUNDAMENTALS 

company— i. <?., one in which there are no stockholders, 
what is not needed for “the surplus” is distributed 
among the policyholders in as nearly as possible the 
same ratio as their policies have contributed to the 
savings in mortality and loading and to the gains in 
interest. Some stock companies do a participating, or 
mutual, business, to the extent that they distribute a 
large part of the surplus earned during the year to the 
holders of participating, or mutual, policies, in addition 
to paying the year’s dividend to stockholders on their 
invested capital. Most stock companies do a non¬ 
participating business— i. e., they do not distribute 
any of the year’s surplus to their policyholders. 

But it must be remembered that the gross premiums 
for nonparticipating policies are usually considerably 
less than mutual, or participating, gross premiums. 
The net premiums are the same, on a given interest 
basis, whether a company is participating or non¬ 
participating; but nonparticipating expense loadings 
are the lesser; indeed, they are usually inadequate for 
the expenses. The nonparticipating company depends 
on the current year’s surplus—savings in mortality and 
gains in interest—to make up the deficiency of the 
loadings. Some stock companies have a deficiency in 
loadings of several million dollars in the course of a 
year, but by careful selection of risks and capable 
investment of their funds are able to save enough in 
mortality and gain enough in interest to make good the 
deficiency, pay their stock dividends, and add to the 
surplus. 

On the other hand, the mutual company adds to the 
net premium a loading estimated to be ample to provide 


SURPLUS AND “DIVIDENDS” 


237 

for expenses and emergencies, thus establishing a higher 
gross premium than the nonparticipating company. 
But it reduces the annual cost to policyholders materi¬ 
ally by distributing whatever current surplus is not 
needed for the emergency fund, furnishing insurance at 
a diminishing rate. 

The word “dividend,” as applied to the distribution 
of current surplus to policyholders, is in reality rather 
a misnomer. It is not a dividend in the sense that a 
stock dividend is a profit on invested funds. Some 
companies call the policy dividends “shares of surplus” 
or “refunds.” “Shares of surplus” is a very good 
name, accurately descriptive of the nature of the policy 
dividend. The name “refund” implies that something 
which the policyholder paid in is handed back to him, 
and this is largely the case with the policy dividend. 
The policyholder pays a net premium which, because 
of very careful selection of risks, is more than is needed 
and a loading which was meant to be ample for ex¬ 
penses and emergencies, and which often (though not 
always in the recent years of high expenses) is more 
than sufficient to cover expenses. The current surplus 
derived from these excess payments and distributed is 
indeed a refund. But the dividend is not entirely a 
refund. The earlier dividends of a policy are very 
largely so, for mortality savings in each new group 
are large, especially in the first four or five years' 
experience of a large number of new policyholders; but 
gradually, as the new group persists, the effect of 
medical selection diminishes and the mortality savings 
decline considerably. On the other hand, that portion 
of the current surplus which comes from interest gains 


238 LIFE INSURANCE FUNDAMENTALS 

is smaller in the earlier years, when reserves are small, 
and much larger in later years. The reserve grows 
constantly from year to year, and if the average net 
interest earned continues at about the same rate 
indefinitely the surplus interest (above 3 per cent or 
3 Yi per cent) increases constantly. The interest factor 
of the dividend is in reality a profit to the policyholders 
on their reserves. The student can see, therefore, that 
the dividend is both a refund and a profit, but neither 
exclusively. Perhaps the best name is “share of sur¬ 
plus” or “surplus payment.” However, the word 
dividend has been used so long that it would take a 
concerted action on the part of a large number of 
companies over a considerable period to dislodge it 
from our life-insurance vocabulary. 

The “unassigned funds” and “dividends” are some¬ 
times called, respectively, “undivided surplus” and 
“divisible surplus.” 


CHAPTER XVIII 


ANNUITIES 

B Y annuity is generally understood an annual pay- 
1 ment for life— i.e., payable as long as the recipient, 
the annuitant , lives, but ceasing at death. Such annui¬ 
ties are called life annuities to distinguish them from 
temporary annuities— i.e ., annuities limited to a definite 
term of years, but ceasing if the annuitant dies before 
the end of the period. 

The chief value of a life annuity lies in the fact that 
it provides a guaranteed income for life. If an elderly 
person purchases an annuity, there is an added advan¬ 
tage in that the annual income is large for the amount 
invested, as compared with interest rates on very safe 
investments; but this is not the case for younger 
annuitants. 

Like life insurance, the annuity is based on the 
“mortality” table, but it is determined by the number 
of people living at the end of each year instead of the 
number dying. Also, like life insurance, the annuity 
depends upon group co-operation. To guarantee to pay 
an annuity to only one person in consideration of a 
given payment would simply be gambling, a bet that 
the annuitant would die before you paid him more 
than he paid for the annuity. But, as in life insurance, 
a large group of annuitants have an average duration 
of life for various ages of entrance that is sufficiently 


239 



240 LIFE INSURANCE FUNDAMENTALS 

regular, year in and year out, to enable us to pay fixed 
annuities upon the basis of definite premium charges. 

Immediate Annuity. By a life annuity, we mean, 
unless it is otherwise stated, a single-premium immediate 
life annuity— i.e., an annuity that is to begin one year 
from the date on which the single premium is paid. 
For example, in a certain American company an imme¬ 
diate life annuity of #1,000 (a year) can be obtained by 
a woman Go years old for a single premium of #11,670. 
At the same age a man would pay only #10,340. 

Deferred Annuity. The name immediate annuity is 
used to distinguish this form from the deferred life an¬ 
nuity, which starts a certain number of years after the 
premium has been paid. For example, a person 35 
years old wishes to receive an annuity in old age, pays 
a single premium at age 35, and receives an annuity 
policy which provides that he will begin to receive an 
annuity of #1,000 at age Go. The deferred annuity is, 
however, usually not purchased by a single premium, 
but by annual premiums payable from the date of pur¬ 
chase until the beginning of the year at the end of 
which the annuity payments will begin. 

The deferred annuity is becoming more and more 
popular in this country as a means of providing an old- 
age income, especially for persons who have no depend¬ 
ents and to whom life insurance is less essential. Single¬ 
premium immediate annuities, long popular in Europe, 
are growing in favor in the United States. 

Annuity Rates. From the rates quoted above, it is 
apparent that the premiums for annuities are higher on 
male lives than they are on female lives; for female 
annuitants show a tendency to greater longevity than 


ANNUITIES 


241 


do male annuitants. In life insurance, the greater the 
risk of death the higher the premium. Annuity charges 
are quite the contrary: the less the risk of death, the 
higher the premium, because in return for the premium 
paid, the life-insurance company guarantees to pay the 
annuity as long as the annuitant lives. Obviously, no 
medical examination is required for annuity contracts. 
The poorer the health of the applicant, the smaller is 
the risk assumed by the company. 

Annuities may be paid semiannually, quarterly, or 
monthly, for slightly higher premiums. Under the im¬ 
mediate annuity, the first annual payment is due at 
the end of the first year. Therefore, if installment pay¬ 
ments are to begin six, nine, or eleven months earlier, 
the company will lose some interest for six, nine, or 
eleven months and less; there would also always be a 
loss in the year of death to provide for, as the annuity 
is really due at the end of the year. Hence, there is a 
slight increase in the premiums for semiannual, quar¬ 
terly, or monthly payments. The single premium 
quoted above for a $1,000 annuity on a male life, age 
60, is $10,340. The premiums in the same company 
for $1,000 a year payable in semiannual, quarterly, and 
monthly installments of $500, $250, or $83.33 are, re¬ 
spectively, $10,600, $10,720, and $10,840. 

Annuity rates are quoted in two ways: (1) the pre¬ 
mium to provide $100 of annuity, and (2) the amount 
of annuity purchased by $1,000. For a male life, aged 
60, in the company cited above these two rates are (1) 
$1,034 t0 buy a $100 annuity and (2) $1,000 to buy an 
annuity of $96.71 (returning 9.671 per cent of the prin¬ 
cipal annually). However, this 9.671 per cent is not 


242 LIFE INSURANCE FUNDAMENTALS 

interest— i.e not all interest. Each year’s payment is 
a combination of interest and a part of the premium 
paid. When the annuitant dies, even if his death occurs 
between the time when he paid his premium and before 
he receives the first annual payment, his estate has no 
further claim whatsoever on the company. 

Annuities and Annual Premiums Compared . The 
student will recall that in computing the annual pre¬ 
mium the first step was to find the present value of an 
annual premium of #i paid by each survivor through¬ 
out the premium-paying period. It was found that at 
age 35 the present value of a five^ear annual premium 
of #i (American Exper. Table and 3%) was #4.635— 
i.e. y #4.635 was that sum which, paid by each person 
living at age 35, would enable the company, with in¬ 
terest earned at 3 per cent, to credit each survivor each 
year for five years, beginning at once, with a payment 
of #1. 

Let us imagine a similar, yet opposite, transaction. 
Each person in the group who is living at age 35 will 
pay the company #4.635. Immediately the company 
will pay back to each one #1, and will pay #1 to each 
survivor at the end of the first, second, third, and fourth 
years. The company would be paying to the policy¬ 
holder a temporary annuity of #1, limited to five pay¬ 
ments, the first to be made at once, the others at the 
end of the first, second, third, and fourth years. Thus 
we see that while #1 a year paid by each survivor in the 
group to the company is an annual premium, #1 a year 
paid by the company to each survivor is an annuity. 

Annuity-'Due.” The annuity just described, having 
the first payment made at once, after the annuitant has 


ANNUITIES 243 

paid his single premium, is called an annuity-due. To 
make the five-year annuity-due clear, we shall repeat 
that the first payment is made at the beginning of the first 
year , the second, third, fourth, and fifth payments be¬ 
ing made at the end of the first , second, third, and fourth 
years; whereas the first payment of an immediate an¬ 
nuity is made at the end of the first year, etc. 

The annuity-due is not actually sold except on the 
deferred-annuity plan. For example, a person 35 years 
old who desires to have an annuity begin at age 55 
pays annually a sum which will accumulate at interest, 
by age 55, the net single premium at 55 for a life annuity- 
due, the first payment being made at the time the full 
net single premium accumulation has been completed— 
i.e., at the beginning of the annuitant’s fifty-sixth year 
(attained age 55). 1 

Except in the deferred life annuity-(due), the annuity- 
due is used only in computation. In this book, in the 
calculation of the net annual level premium, we spoke 
of finding the “ present value of a net annual level pre¬ 
mium of $i y ” which was divided into the net single 
premium of the insurance under consideration; but 
most textbooks speak of finding the ‘‘present value of 
an annuity-due of $1,” and divide this present value 
into the single premium of the insurance. The two pres¬ 
ent values are, of course, really one and the same thing. 

Single Premium , Temporary Immediate Annuity. Let 
us compute, for age 3 5, the net single premium of a five- 
year immediate annuity of $1. 

1 A baby is not one year old until it has lived to the end of its first year. 
When it is bom it is o years old. When a man reaches age 55 he has com¬ 
pleted 55 years and is at the beginning of age 56. But he is not 56 years old 
until the end of the year. 


244 LIFE INSURANCE FUNDAMENTALS 

The single premium is to be paid at 35; the first 
annuity payment is to be made one year later and will 
be paid annually thereafter until payments of $1 each 
have been made to all survivors for five years. The 
survivors at the end of each year for five years, starting 
at 35, will, according to the American Table, be those 
living at the beginning of each year for five years, start¬ 
ing at 36; for the American Experience Table shows the 
number living at the beginning of the year: 


Table of Survivors to Receive Five-year Immediate Annuity, Rated 


End 


Age 

35 


Total Annuity 

of Year 

Age 

No. Living 



Payments 

1 

36 

81,090 

X 

$1 

= $81,090 

2 

37 

8o,3S3 

X 

$1 

= 80,353 

3 

38 

79,611 

X 

$1 

= 79,6ii 

4 

39 

78,862 

X 

$1 

= 78,862 

5 

40 

78,106 

X 

$1 

= 78,106 


The purpose of the single premium is to provide a 
fund paid in by all those living at the beginning of the 
period aged 35 (81,822), which, with interest at an 
assumed rate, say, 3 per cent, will enable the company 
to pay $1 to each survivor at the end of each year for 
five years. This fund must, therefore, be the present 
value of all the payments to be made: 


Table of Present Values of Immediate Annuity of $1 for Five Years 

Age 35 


End 

Total Annuities 


Present Value of 

Total Present 
Value of Annu¬ 

of 

End of Each 


$1 Due at End 

ities Payable 

Year 

Year. 


of Year. 

End of Year. 

I 

$81,090 

X 

$.970874 

$78,728.17 

2 

80,353 

X 

.942596 

75,740.42 

3 

79,611 

X 

.915142 = 

72 , 8 S 5-3 7 

4 

78,862 

X 

.888487 = 

70,067.86 

5 

78,106 

X 

.862609 = 

67 , 374-94 


Total Present Value of All Five-year Annuity Payments $364,766.73 



ANNUITIES 245 

$364,766.73 -j-81,822 =$4,458 =net single premium of 
a five-year immediate annuity, age 35. 

Of course, the net single premium for an annuity of 
$100 or $1,000 on the above plan would be 100 or 1,000 
times $4,458. 

In the same way the present value, or net single pre¬ 
mium, of an immediate life annuity may be computed 
by finding the present value of $1, to be paid to each 
survivor at the end of each year from the first annuity 
year to the end of the table. The computation is the 
same as that of the problem on page 179 to find the net 
single premium equivalent to an annual whole-life pre¬ 
mium of $1, except that no payments are to be provided 
for the beginning of the first year. 

Annuity Basis. Annuities are often based on other 
tables than the American Experience Table of Mor¬ 
tality, for the average longevity of annuitants is greater 
than the average according to the American Experience 
Table. Special annuity tables have been compiled. It 
has also been the practice of some companies to assume 
4 per cent interest, rather than 3 per cent or 3^2 per 
cent, for annuity net premiums. 

The Continuous Installment Option. In the continu¬ 
ous installment optional settlement of life, endowment, 
and term policies, the income paid to the beneficiary for 
life, following expiration of the installment certain 
period, is a deferred annuity-due, based on the age of 
the beneficiary at the time of the insured’s death, but 
deferred to the beginning of the twenty-first year fol¬ 
lowing his death. 

Assume that the insured under a 3 per cent policy 
dies when the beneficiary is 25 years old. Immediately 


246 LIFE INSURANCE FUNDAMENTALS 

the company pays the beneficiary the first installment 
certain, #43.16 (American Experience Table, 3 per cent), 
which is repeated until twenty annual payments have 
been made, whether the beneficiary lives that long or 
not. If she is alive at the beginning of the twenty- 
first year, she receives the annuity payment under the 
deferred life annuity-due, #43.16, and will continue to 
receive this annuity as long as she lives. 

The two parts of the continuous installment plan 
may be represented by the following diagram: 


Age Age 

25 45 


Installments payable for 

twenty years certain, 
whether beneficiary lives 
that long or not. 


Deferred life annuity-due, payable from 

beginning of 21st year, continuing as 
long as beneficiary lives, but ceasing at 
her death. 


#1,000 at age 25 is sufficient to provide two things: 
(1) an annual installment of #43.16 for 20 years certain 
and (2) a life annuity-due, deferred 20 years, of #43.16. 

Computing the Continuous Installment. Let us calcu¬ 
late the amount of money that will be required for each 
survivor at age 25 (when the first installment is paid) 
in order that a continuous installment of #1 may be 
paid with twenty years certain. The present value of 
#1 a year due at the beginning of each year for twenty 
years at 3 per cent compound interest is #15.324. This 
sum on hand at the insured’s death wi 1 provide #1 a 
year for twenty years certain, if 3 per cent interest is 
earned. 

At the end of the twenty years the beneficiary will be 
45 years old. In addition to the #15.324 we must have 
for each person living at 25 that sum which at com¬ 
pound interest for twenty years will provide for each 




ANNUITIES 247 

survivor at age 45 the net single premium, or present 
value, of a life annuity-due of #1. 

The present value of a life annuity due of #1 at age 
45 (3 P er cent) is #17.01, found in the same way in 
which we found the net single premium, at 35, equiva¬ 
lent to an ordinary life net premium of #1 (#19.92). 
This sum of #17.01 must be on hand at 45 for each 
survivor , in order that we may pay the life annuity due 
to all survivors, as long as any are living, the first pay¬ 
ment being made immediately, at age 45. Referring to 
the American Experience Table, we find that the num¬ 
ber living at age 45 is 74,173. The total annuity fund 
at 45 must, therefore, be 74,173 X #17.01, or #1,261,- 
682.73. This fund is to be ready at 45 from funds on 
hand at 25, but not used for twenty years. We shall, 
therefore, find the present value of #1,261,682.73 ^ ue 
twenty years hence: #1,261,682.73 X .553676 = #698,- 
563.4472. This total present value divided among the 
survivors at 25 is #698,563.4472 -^-89,032, or #7.846, the 
individual share, which is the present value or net single 
premium at age 25 of a deferred life annuity-due of #1, 
starting at age 45. To put it another way, #7.846 is the 
net single premium at 25 of a 20-year pure endowment 
of #17.01 due at age 45, which, in turn, is the net single 
premium at 45 of a life annuity due of #1. 

Now, if #15.324 will provide #1 a year for twenty 
years certain, and #7.846 is the net single premium at 
age 25 for a twenty-year deferred life annuity-due of 
#1, then the sum of the two, #23.17, will provide for 
a beneficiary 25 years old a continuous installment of 
#1 for twenty years certain and for life; and the pro¬ 
ceeds of a #1,000 policy will provide a continuous an- 


248 LIFE INSURANCE FUNDAMENTALS 

nual installment to be found as follows: $1,000-^23.17 
= $43.16, which is the continuous installment of $1,000 
at age 25 based on the American Experience Table and 
3 per cent interest. 

Special annuity tables are used by some companies 
in calculating the continuous installments; and, of 
course, many companies assume 3 yi. per cent interest. 

Last-Survivor Annuities. Some companies issue an 
annuity payable jointly to two (or more) persons and 
to be continued as long as either of them survives. 
Such a plan may be very serviceable for brothers or 
sisters, husband and wife, mother and daughter, etc. 

Survivorship Annuity and Deferred Survivorship An¬ 
nuity. These plans are discussed under the analysis of 
the life-income policy, pages 333 and 343. 

The Income Bond. This is a form of deferred annuity, 
usually purchased on the annual premium plan, modi¬ 
fied in such a way as to avoid complete forfeiture of 
premiums in case of the death of the annuitant. 

For example, in a certain 3 per cent company, a 
person 30 years old who desires an annuity of $10 to 
start at age 65 pays $19.99 annually, his last payment 
being made one year before he is to receive his first 
annuity payment. If the annuitant dies before com¬ 
pleting his payments, a refund of all or a specified por¬ 
tion of the premiums paid will be made to his estate or 
beneficiary. If he dies after he has begun to receive his 
annuity payments, but before he has received at least 
as much as he paid to the company, the difference will 
be refunded to his estate or beneficiary. 

Ordinarily, annuities do not provide for any refunds 
in case of the annuitant’s death, or cash values. How t - 


ANNUITIES 249 

ever, the premiums for the income bond are so calcu¬ 
lated as to allow for such refunds and for cash values 
after a certain number of years—usually three years. 

Refund Annuity Contracts. Immediate life annuities 
are sometimes calculated on a ba^is that allows a re¬ 
funding of any excess of premium payments over an¬ 
nuities received, in case of the annuitant's death. There 
are two methods of refunding: (1) to continue annuity 
payments until the difference is made up; (2) to refund 
the difference in cash. 

Annuity-Certain. The annuity-certain is not a true 
“ annuity” in the sense in which this word has been 
used up to the present time. Yet, it is in common use 
to designate annual payments certain, such as the in¬ 
stallments certain already so frequently referred to. 
Obv usly, mortality is not involved in any way in com¬ 
puting the “ annuity-certain." The only factors are 
principal, a rate of interest, and the number of years 
during which payments are to be made. 





PART IV 


LIFE INSURANCE POLICIES 



4 





* 















CHAPTER XIX 

THE CONTRACT—POLICY AND APPLICATION 

T HE life-insurance policy is an extremely interesting 
document, not only because of the extraordinary 
benefits accomplished by it, but also by reason of its 
many significant details. There are so many important 
contingencies to be provided for that the life-insurance 
policy presents an almost fascinating subject for the 
student. 

It should go without saying that the man, or woman, 
who enters the profession of life underwriting ought to 
master the various policies of his company. Otherwise, 
he, or she, will not be in a position to plan correct in¬ 
surance programs for clients. Different problems of 
clients require different solutions. Once the client’s 
needs are determined, the underwriter’s recommenda¬ 
tions involve the choice of policy, of method of paying 
the insurance to beneficiaries, the best use of dividends 
(in case of participating insurance), the selection of a 
nonforfeiture option, the drafting of the beneficiary 
clause to suit the insured’s interest, the convenient ar¬ 
rangement of an annual premium date, the co-ordination 
of old policies with new, and sometimes various other 
details. 

A thorough understanding of policy contracts is nec¬ 
essary both for an intelligent planning of the client’s 
insurance and in order that his questions may be prop- 


253 


254 LIFE INSURANCE FUNDAMENTALS 

erly answered. Furthermore, after his insurance has 
been put in force, the underwriter’s obligation of service 
does not end; but, rather, as the client’s family and 
financial situations change from time to time, he will 
need counsel in connection with the adjustment of his 
policies to new conditions. The professional under¬ 
writer must be prepared for complete service, and 
must, therefore, understand the details of his com¬ 
pany’s contracts and its practices, and know also the 
principal practices found in the contracts and pro¬ 
cedure of companies in general. 

THE POLICY CONTRACT 

Although we commonly refer to a life-insurance policy 
as a “contract,” the policy is only one part of the con¬ 
tract, which must, of course, have a first party and a 
second party, like any other contract. We may call the 
life-insurance company the first party and the person 
insured, who is known as the insured, or policyholder, 
the second party. The life-insurance policy sets forth 
what the company undertakes to do for the beneficiary 
and the policyholder, the various privileges granted, 
and the conditions under which the company’s prom¬ 
ises are made. 

The portion of the contract furnished by the second 
party is the application for insurance which he submits 
to the company, containing his answers to certain ques¬ 
tions. These answers constitute a large part of the in¬ 
formation on which the company bases its decision to 
accept or reject the request for insurance. In addition 
to the application the company also usually requires a 
physical examination to be made by its “medical ex- 


THE POLICY CONTRACT 255 

aminer,” and secures what is called an inspection report 
(through its own “inspectors” or through an inspection 
company) in regard to the reputation, habits, and finan¬ 
cial standing of the applicant. 

The application is the first step in the contract. The 
issuance of a policy based on the application completes 
the form of the contract. If a policy is issued, the com¬ 
pany attaches to it a copy, either photographic or in 
writing, of the application, thus making the form of the 
contract complete. The contract becomes effective 
upon its delivery by the company and upon payment 
by the applicant of the first premium. 

Since the application is, largely, the basis on which 
the policy is to be issued or declined, it is expected that 
the statements made by the applicant shall be true. In 
former times, the statements were held to be warran¬ 
ties (as are statements which may be made in connec¬ 
tion with an application for fire insurance)— i.e., the 
applicant guaranteed his statements to be true. If, 
later, it were proven that any of them was erroneous, 
it could be held that the contract was not binding and 
the company was not under obligation to pay the insur¬ 
ance; in other words, the insurance was forfeited for 
false statements or misrepresentations. 

The tendency among life-insurance companies is to 
liberalize their contracts whenever it seems as if greater 
privileges, or concessions, may be allowed with safety. 
In line with this tendency, in recent years policies 
usually contain a clause to the effect that the state¬ 
ments in the application shall be deemed to be repre¬ 
sentations and not warranties— i.e . 9 that the applicant 
shall be held to make statements which, to the best of 




256 LIFE INSURANCE FUNDAMENTALS 

his knowledge and belief, are true. What is particu¬ 
larly important is that statements shall be “ substan¬ 
tially correctthat erroneous statements which are 
not material to the risk shall not jeopardize the insur¬ 
ance. It remains, nevertheless, binding on the appli¬ 
cant to tell the truth, and fraud will avoid the policy, 
if discovered within a certain time limit, usually one 
or two years. The elimination of warranties in the ap¬ 
plication is a protection to innocent beneficiaries who 
might otherwise be unjustly deprived of their insur¬ 
ance money. 

The application consists of two parts. Part I is a brief 
list of questions and is secured by the agent. Part II 
is a much longer list of questions and is secured by the 
medical examiner at the time of the medical examination. 

PART I OF APPLICATION 

While the applications of different life-insurance com¬ 
panies are similar, they vary somewhat as to the specific 
questions asked. (At this point the student should read 
carefully Part I of his company’s application.) 

Name , Address , etc. The questions as to the full name, 
residence, etc., are more important than may at first 
appear. Identical names are very common, and it is 
necessary that the company have various means of es¬ 
tablishing the identity of an individual. The need for 
this is particularly important when it comes time to 
pay the death claim. The applicant should write his 
name in full, and the more names he has, the better. 

Relationship of Beneficiary. It is customary to ask 
for the relationship of the beneficiary to the insured. 
This is done to make sure that the proposed beneficiary 


APPLICATION 257 

has a legitimate financial interest in the life of the ap¬ 
plicant, as well as to assist in identifying the bene¬ 
ficiary. There is a “moral hazard” in life underwrit¬ 
ing, and this hazard is minimized if the beneficiary is a 
person who has a legitimate interest in the continuance 
of the life of the applicant. In general, anyone who has 
a legitimate claim upon another for support or for the 
payment of some obligation, or who would suffer some 
legitimate financial loss through the death of another, 
has an insurable interest in that other person’s life. If 
the relationship does not show' clearly that the bene¬ 
ficiary has a legitimate financial interest in the life of 
the applicant the company will make specific inquiries 
in order to make the insurable interest perfectly clear. 

Amount of Insurance Already Carried. The amount 
of insurance a man can carry depends on his financial 
ability and his needs for insurance. A life-insurance 
company is justified in ascertaining whether or not a 
man’s present insurance in various companies, together 
with the amount applied for, is disproportionate to his 
financial ability and his needs. A moral hazard is 
sometimes revealed by a purpose to secure an excessive 
amount of insurance. An illustration of this would be 
the effort made by some men who contemplate suicide 
to increase their insurance to large amounts, which nor¬ 
mally they could not afford to carry. Related to the 
question regarding the insurance already carried is the 
one, usually asked, as to whether the applicant has ap¬ 
plications for insurance pending with other companies. 

Change of Beneficiary. Some companies consider it 
very important that the applicant be given an oppor¬ 
tunity to decide whether or not he will reserve the 


258 LIFE INSURANCE FUNDAMENTALS 

right to change the beneficiary, and insert a question 
to this effect in the application. The applicant’s choice 
will determine whether he is to retain complete control 
of the policy or whether he is to relinquish it. If he 
reserves the right to change the beneficiary, he may 
change the beneficiary as often as he pleases; he may 
borrow on the policy without the approval of the bene¬ 
ficiary; he may surrender the policy for its cash value; 
or he may make an assignment of it at his pleasure. 
But as he is the owner of the policy, the cash 
values of his insurance may be taken as a part of his 
assets to satisfy the claims of creditors, except that, in 
some states, there is an exception made of a certain 
amount of insurance, usually the amount paid for by a 
certain maximum of premiums. But if the policy¬ 
holder has not reserved the right to change the bene¬ 
ficiary, he is no longer sole owner of the policy. He 
cannot borrow on it or secure its cash value or assign it 
without the consent of the beneficiary. 

Usually the policy expressly gives the insured the 
right to change the beneficiary, yet allows him the right 
of naming the beneficiary irrevocably. 

Occupation. Perhaps many beginners wonder why 
life-insurance companies wish to know the applicant’s 
occupation. Incidentally, the knowledge of his occu¬ 
pation might at some time aid in identification. But 
the important reason is that the degree of risk assumed 
by the company depends, to some extent, on the occu¬ 
pation in which the applicant is engaged. Even a lay¬ 
man can see that the risk of death among such persons 
as submarine operators, aviators, pow T dermakers, and 
drivers in automobile races would be greater than 


APPLICATION 259 

among office workers, retired farmers, and professional 
men. But it is not commonly understood how many 
variations there are in the risk of death in different oc¬ 
cupations. Life-insurance companies have made an ex¬ 
haustive study of the “occupational hazard/’ 

In answering the question on occupation, the appli¬ 
cant is expected to state his occupation fully. For 
example, “public entertainer” would not be satis¬ 
factory. Elocutionists are not a hazardous class; but 
“aerial acrobats” are. Each company publishes in its 
instructions to agents a list of occupations not accepted. 
The beginner should familiarize himself with this list. 

As various application blanks contain different ques¬ 
tions, only a few typical questions of Part I are 
discussed here. 

PART II OF APPLICATION 

The answers to the questions in Part II of the appli¬ 
cation, secured by the examining physician, and his 
report of the “medical” examination, form the basis of 
the company’s decision, whether the applicant is phys¬ 
ically an acceptable risk or not. 

However obscure the reason for a certain question 
may seem to the layman, every question asked in the 
application has a bearing on the determination of the 
character of the risk. , 

Residence and Travel. Place of residence, or travel, 
is important because the death rate is greater in some 
places than in others. There are certain countries, and 
even certain portions of the United States, which are 
not healthful as compared with the average residential 
localities in this country, or in Canada. Climatic or 


26 o LIFE INSURANCE FUNDAMENTALS 

sanitary and hygienic conditions may be unfavorable 
to health. The death rate in such countries, or locali¬ 
ties, may be so high that a company would not care to 
insure anyone who spent considerable time in them. 

Change in Occupation. If an applicant’s present occu¬ 
pation is satisfactory and he has no present intention 
of entering a hazardous employment, he is an accept¬ 
able risk on this point. But if he expects to change, 
say, from managing the office for a construction com¬ 
pany to supervising construction in tall buildings, there 
would be a question as to his insurability. Very gener¬ 
ally now, under new policies, life-insurance companies 
guarantee protection to the policyholder who changes 
his occupation, or his residence, or who travels in un¬ 
healthful countries. There are thousands of people who 
now have no intention of making such changes, but who 
will, nevertheless, be living, or traveling, in unhealthful 
places or be engaged in more hazardous occupations 
within a period of a few years. The life-insurance com¬ 
panies assume that risk. But they are not willing to 
insure persons who contemplate a hazardous occupation 
or place of residence or travel any more than they are 
willing to insure persons already subjected to such haz¬ 
ards. A company may refuse to insure a professional 
soldier. But if it insured, some time ago, a young man 
who now yields to the tempting offers of Uncle Sam to 
join the army or to see the world with the navy, his 
insurance will be binding on the company so long as he 
pays his premiums. 

There are, of course, many policies still in force which 
do not provide “freedom” of travel or residence. Such 
policies, in the main, were issued a good many years 


APPLICATION 261 

ago. But many companies, now writing a more liberal 
form of policy, have made the liberalized conditions 
retroactive for old policies, not only as to residence and 
travel, but also in numerous other respects. 

Height and Weight. The doctor wants to know the 
applicant s height and weight. Relations between 
height and weight and age determine longevity to a 
considerable extent. Young persons who are under¬ 
weight are more subject to tuberculosis than those who 
are well nourished. Older persons who are too heavy 
for their height are more subject to heart disease and 
other troubles of the circulatory system. There are 
limits above and below average weights for different 
ages beyond which experience shows the death rate 
tends to be greater than normal. 

Family History. The record of the longevity of the 
applicant’s family is important. Families vary greatly, 
of course, in vitality, in degree of strength to resist cold 
and heat, fatigue, and disease. Eliminating strictly acci¬ 
dental deaths, the vital history of a family is of assist¬ 
ance to the medical department in determining the risk. 
Elaborate compilations of data on “family history” 
have been made from the combined experience of many 
life-insurance companies, showing clearly the tendency 
to a greater or less death rate among groups of persons 
whose family records are unfavorable or favorable in 
certain particulars. 

Quite aside from the question of family history, yet 
illustrative of the lessons in mortality to be learned 
from a study of the records of large numbers of insured 
lives, it was found in the “medico-actuarial” investi¬ 
gation of the mortality records of a number of American 


262 LIFE INSURANCE FUNDAMENTALS 


companies, some years ago, that the death rates among 
men and women, classified with reference to marriage, 
ranked as follows, being arranged from the lowest, or 
most favorable, rate to the highest: I. Unmarried 
women. 2. Married men. 3. Unmarried men. 4. 
Married women. 

Such questions as those relating to diseases, the use 
of alcohol and narcotics, require no explanation. 

The Policy. In the application the kind of policy 
desired must be stated. Companies issue many differ¬ 
ent policies of which the principal ones are life, endow¬ 
ment, term, and annuities. Other policies combine 
features of the policies just named. 


CHAPTER XX 


'THE ORDINARY LIFE POLICY 
GENERAL OUTLINE—FACE OF POLICY—SETTLEMENTS— 

BENEFICIARIES 

T HE ordinary life policy has, in the past, been the 
most popular of all the life-insurance plans. In 
recent years it has been supplanted to a certain extent 
by the long-term,endowment policies— i.e., endowments 
running for twenty-five to fifty years, or to ages 60, 65, 
70, and 75. This is due to the increasing emphasis that 
is being laid on the value of life insurance as a means 
of accumulating a competency for old age. Yet the 
ordinary life policy still leads in popularity as the one 
which will furnish “permanent’’ insurance for the least 
annual outlay. 

Ordinary life is a name given to the whole-life policy 
whose premiums are payable annually for life. It pro¬ 
vides for the payment of the face of the policy, say, 
$10,000, when the insured dies, no matter how long he 
may live. If he succeeds in living until he is 96 years 
old, his ordinary life policy will be worth $10,000 in 
cash, and it has substantial cash values at ages 60, 65, 
70, etc., as well as at earlier ages, after one, two, or 
three (according to the company) annual premiums 
have been paid. Thus, the ordinary life policy, like all 
life-insurance policies, with the exception of the term 
policies, has the double function of providing money 
for one’s dependents, if one dies prematurely, or of pro- 

263 


264 LIFE INSURANCE FUNDAMENTALS 

viding for one’s own future, if one lives, besides afford¬ 
ing an emergency fund during the long years in which 
the policy may be in force. Under its beneficent privi¬ 
leges, the beneficiary may have the protecting care of a 
trustee, for the company will hold and invest the pro¬ 
ceeds of the policy, if so requested, and pay the widow 
or the children an income for life or for a specified 
number of years; or the company will hold funds until 
a son or a daughter reaches the age at which he, or she, 
is to enter college, and pay an income through the four 
years, as may have been directed by the father. And 
many other splendid things may be accomplished under 
the various policy privileges. 

A limited payment life policy is the same kind of 
insurance as the ordinary life (that is, it is a whole-life 
policy) except that, instead of paying premiums as long 
as you live, your insurance is fully paid up for life in 
five, ten, fifteen, nineteen, twenty, twenty-five, or thirty 
years. Endowment policies provide insurance for long 
or short terms of years and pay the face of the policy 
to the insured if he is alive at the end of the term. As 
a rule endowment policies are written to run for ten, 
fifteen, twenty, twenty-five, thirty, thirty-five, forty, 
forty-five, or fifty years, or to age 60, 65, 70, 75, 80, 
or 85. . 

All life, endowment, and term policies are exactly 
alike in that they furnish money to the beneficiaries if 
the insured dies within the time for which it was agreed 
the insurance should run. Ordinary life, limited- 
payment life, continuous-premium and limited-premium 
policies, indeed, all policies except term insurance, are 
similar in that they provide money for the insured’s 


THE ORDINARY LIFE POLICY 265 

own future and afford an emergency fund in the mean¬ 
time. Using the ordinary life as our standard of com- 
parison, we may express the general differences between 
various life and endowment policies in the following way: 
If we pay an annual premium larger than that of the 
ordinary life, the excess payment results in one of two 
things either a whole-life policy is to become paid up 
in a certain number of years, which will be fewer the 
more we deposit, or the extreme limit of time for pay¬ 
ment of the face of the policy to the insured himself 
will be brought forward, by means of an endowment, 
from age 96 to an earlier age, which will be the younger 
the larger the premium. 

The differences in the details of the limited-payment 
life policies and the endowment policies, on the one 
hand, and the details of the ordinary life policy, are 
merely such as are due to the two facts that the limited- 
payment policies become fully paid up before age 96, 
and endowment policies cease and pay the face of the 
policy to the insured at an age prior to 96. 

General Outline of Ordinary Life Provisions . When 
the beginner sees a life or endowment policy for the 
first time, it seems to cover a multitude of different 
subjects. There are, indeed, many details, but the gen¬ 
eral subjects are not very numerous, after all. The fol¬ 
lowing titles may be used to classify the various topics: 
(1) payments to beneficiaries in a lump sum or in 
income; (2) provisions relating to the naming of bene¬ 
ficiaries; (3) settlement with the insured, if he ceases 
payment of premiums; (4) loans to the insured on the 
sole security of the policy; (5) conveniences for policy¬ 
holders in meeting premium payments; (6) waiver of 


266 LIFE INSURANCE FUNDAMENTALS 

premium by which further premiums are canceled in 
case of total and permanent disability; (7) disability 
income, payable in case of total and permanent dis¬ 
ability; (8) “ miscellaneous,” including several clauses 
covering reinstatement, assignments, incontestability, 
restrictions, etc.; (9) various conditions under which 
privileges are granted; (10) dividends (under partici¬ 
pating policies); (11) double indemnity in case of some 
companies. 

Face of Policy. The face, or front page, of the policy 
usually sets forth the main agreement of the contract, 
the promise to pay the insurance at death, provided 
premiums have been paid as stipulated. The amount 
of the policy is commonly spoken of as the face amount, 
or “face,” of the policy. In many companies the 
essence of the contract is covered on the front page, 
and the contract is signed by the president and secre¬ 
tary at the bottom of the page, the president’s sig¬ 
nature usually being printed and the secretary, or an 
assistant secretary, or a registrar, actually signing. By 
a special clause the provisions on the subsequent pages 
(after the signatures) are made a part of the contract. 
In the policies of other companies the official signatures 
are at the end of the policy. 

The Consideration. A contract must set forth what 
is to be performed (the undertaking) by one party and 
the consideration to be paid, or furnished, by the other 
party in return for the service to be rendered. The 
undertaking in the ordinary life policy is the payment 
of the insurance. Two considerations are named in 
many policies, the premium to he paid and the application 
for the insurance, though some companies mention 


THE ORDINARY LIFE POLICY 267 

only one consideration, viz., the payment of the 
premiums. 

The Net Amount of Insurance . The amount of insur¬ 
ance payable at the death of the insured is the face 
amount of the policy less any indebtedness and less any 
unpaid installments of the annual premium. If there 
is a loan on the policy or any unpaid interest on a loan, 
these are to be deducted. It must be remembered that 
the full annual premium is really due at the beginning 
of the year; if, therefore, the policyholder has arranged 
to pay premiums in semiannual or quarterly installments 
and dies before completing any full year’s payment, the 
unpaid balance of the premium for the year must be 
paid by deduction from the amount of the insurance. 

Lump-sum Payment. In all policies, except a few pro¬ 
viding for installment or annuity payments, the pay¬ 
ment specified in the face of the policy is a lump sum, 
as, for example, #10,000. 

Optional Income Settlements. However, recognizing 
the desirability of protecting the beneficiary’s insur¬ 
ance fund by paying her an income, rather than a lump 
sum, the company inserts in the policy optional income 
settlements, usually three different kinds, providing 
that the proceeds of the policy shall be held by the 
company and that an income shall be paid to the 
beneficiary. 

Generally, it is stated in the policy that the bene¬ 
ficiary shall not have the right to withdraw or commute 
the insurance fund or to assign the income contract or 
any part or installment of it, unless the insured speci¬ 
fied to the contrary in his application for the optional 
settlement. In some policies this provision is stated 


268 LIFE INSURANCE FUNDAMENTALS 

differently, viz., that unless the insured has specified to 
the contrary, the beneficiary may withdraw the principal 
sum or commute the installments; in case of such policies, 
if the insured wishes to prevent commutation or assign¬ 
ment, he must so state in his application for the op¬ 
tional settlement. The student should note carefully 
how this clause is worded in his company’s policies and 
supplemental agreements, or indorsements, for optional 
income settlements. 

In order to secure an income settlement, the policy¬ 
holder makes written application to the company, and 
the company issues a supplemental agreement or places 
an indorsement (usually by rubber stamp) on the policy, 
providing for the payment of the insurance on an in¬ 
come plan. The insured has the right to change or 
revoke any income settlement which he may have 
chosen. 

If, at the policyholder’s death, the insurance is pay¬ 
able in a lump sum, the beneficiary may secure, on her 
own application, one of the income settlements in lieu 
of a payment in a single sum. Unfortunately, however, 
a beneficiary seldom exercises this privilege; if she is 
to have a guaranteed income, the only sure way is 
for the policyholder to apply for one of the optional 
settlements. 

The three usual income settlements are: (i) the in¬ 
terest income; (2) the continuous installment income; (3) 
the limited installment income . 

Interest Income. The proceeds of the policy may be 
left with the company at interest, the interest income to 
be paid to the beneficiary for life or for a definite num¬ 
ber of years, the lump sum being payable, at her death, 


THE ORDINARY LIFE POLICY 269 

to her estate or to a contingent beneficiary. If the 
interest is payable to the beneficiary for a stated num¬ 
ber of years, the principal sum may be paid to her at 
the end of the period, if she is living; otherwise, to her 
estate or to a contingent beneficiary. 

A minimum rate of interest is guaranteed, 3 per cent 
or 3/^ P er cent. Under a participating policy, excess 
interest, often approximating per cent above 3 per 
cent, or 1 per cent above 3 yi per cent, is paid, making 
the total interest rate, say, about per cent— i.e., 
about #450 a year on #10,000. The company also guar¬ 
antees to keep the principal sum intact and to pay it 
when it becomes due. Interest payments are begun at 
the end of the first year following the insured’s death 
or at the beginning of the second quarter-year; some¬ 
times the annual interest income is discounted at a 
rate of interest and paid monthly, beginning with the 
first month following the insured’s death. 

Continuous Installments. If the amount of insurance 
is not sufficient to produce a life income at the interest 
rate, the continuous installment income plan may be 
chosen (see the table of continuous installments in your 
company’s policy). This plan provides an income of a 
certain number of dollars a year for each thousand dol¬ 
lars of insurance, to be paid for a given number of 
years “certain,” usually twenty, whether the bene¬ 
ficiary lives that long or not, and as long beyond the 
twenty years (or any other selected period) as she may 
live. If the beneficiary dies before the end of twenty 
years, the balance of the twenty years’ guaranteed 
annual payments will be made to the contingent bene¬ 
ficiary, or, if there is no contingent beneficiary, the 


2 7 o LIFE INSURANCE FUNDAMENTALS 

cash equivalent of the balance of the twenty annual 
payments certain will be paid to the beneficiary’s 
estate. 

SPECIMEN TABLES OF CONTINUOUS INSTALLMENTS 


20 Years Certain, 3H Per Cent 


Age of Payee 
when Policy 
matures 

Amount of 
each 

Installment 

Age of Payee 
when Policy 
matures 

Amount of 
each 

Installment 

Age of Payee 

when Policy 

matures 

Amount of 

each 

Installment 

Age of Payee 

when Policy 

matures 

Amount of 

each 

Installment 

16 and under 

$44.00 

33 and 34 

$50.00 

44 and 45 

$56.00 

53 and 54 

$62.00 

17 to 21 

45.00 

35 and 36 

51.00 

46 

57.00 

55 and 56 

63.00 

22 to 24 

46.00 

37 and 38 

52.00 

47 and 48 

58.00 

57 

64.00 

25 to 27 

47.00 

39 and 40 

53.00 

49 

59.00 

58 and 59 

65.00 

28 to 30 

48.00 

41 and 42 

54.00 

50 and 51 

60.00 

60 and over 

66.00 

31 and 32 

49.00 

43 

55.00 

52 

61.00 




20 Years Certain, 3 Per Cent 


Age of Payee 
when Policy 
matures 

Amount of 
each 

Installment 

Age of Payee 
when Policy 
matures 

Amount of 
each 

Installment 

Age of Payee 
when Policy 
matures 

Amount of 
each 

Installment 

1 

Age of Payee 
when Policy 

matures 

Amount of 

each 

Installment 

i 

17 or under 

$40.00 

35 and 36 

$47.00 

47 

$54.00 

57 and 58 

$61.00 

18 to 21 

41.00 

37 and 38 

48.00 

48 and 49 

55.00 

59 and 60 

62.00 

22 to 24 

42.00 

39 and 40 

49.00 

50 

56.00 

61 and 62 

63.00 

25 to 27 

43.00 

41 

50.00 

51 and 52 

57.00 

63 

63.00 

28 to 30 

44.00 

42 and 43 

51.00 

53 

58.00 

64 to 66 

64.00 

31 and 32 

45.00 

44 

52.00 

54 and 55 

59.00 

67 and 68 

64.00 

33 and 34 

46.00 

45 and 46 

53.00 

56 

60.00 

69 and over 

65.00 


The annual payment varies in amount according to 
the age of the beneficiary at the time of the insured’s 
death. If calculated to cents, there will be a different 
figure for each age, as shown in the tables of many 
companies. In the above tables, round average 
amounts are used for ages having approximately the 
same installments. 

If the installment certain period is less than twenty 
years, the installments are greater than those given in 
the above tables; and they are less if the period certain 
is greater than twenty years. 

Note that the continuous installment income has no 





































THE ORDINARY LIFE POLICY 271 

advantage over the interest plan for young beneficiaries, 
being approximately #40 per $1,000 of insurance (for 
3 per cent companies). But the amount of the install¬ 
ment per #1,000 of insurance is greater the older the 
beneficiary at the time of the insured’s death— e.g., 
about #44 at age 30, #49 at age 40, about #56 and #62 
at ages 50 and 60, respectively, for 3 per cent policies; 
a little more for 3^ per cent policies. Thus, at the 
older ages, there is an advantage in the continuous in¬ 
stallments over the interest. 

Under participating policies, as well as under a few 
non-participating-premium policies, there is paid in ad¬ 
dition to the guaranteed installment, during the twenty- 
year certain period only, excess interest on the commuted, 
or present, value of the future installments, often ap¬ 
proximating about 1 yi per cent for 3 per cent policies 
or 1 per cent for 3^ per cent policies, the percentage 
varying in different companies. This excess interest 
grows less and less from year to year (being eliminated 
in the twentieth year) because the amount of the com¬ 
muted value decreases. For example, the interest 
might be #10 per #1,000 of insurance at the end of the 
first year, and nothing for the twentieth year, averag¬ 
ing, say, about #5 a year for the twenty years. Also, 
the excess interest varies in another way: the greater 
the age of the beneficiary at the time of the insured’s 
death, the larger will be the amount of interest. The 
percentage rate of excess interest would be the same for 
all ages in a given company; but the amount of interest 
would be greater the older the beneficiary, because the 
commuted value is larger, the older the beneficiary at 
the time of the insured’s death. 


272 LIFE INSURANCE FUNDAMENTALS 

Commuted Value. What is the commuted value? It 
is, at any time, the amount of principal necessary with 
3 per cent or 3^ per cent interest to pay all the future 
installments certain. The commuted value is the present 
value of the future installments certain. The annual 
installment certain payments begin at the death of the 
insured and are payable on each anniversary of the 
first payment— i.e ., at the beginning of each year, for 
twenty years, no matter whether the beneficiary lives 
that long or not. Payments beyond the twentieth year 
are annuity payments, made only so long as the bene¬ 
ficiary lives. 

Since the twenty annual payments certain are not 
affected by the longevity of the beneficiary, no mor¬ 
tality is taken into account in calculating them; it is 
just a question of principal and interest sufficient to 
produce them. 

From the compound discount tables in your rate 
book you will see that the present value of an annual 
payment of $1 due at the beginning of each year for 
twenty years at 3 per cent is The present 

value of an annual installment of #40 (say, about age 
16) payable at the beginning of each year for twenty 
years would be 40 X $15,324, or #612.96. This is the 
amount that is set aside by the company to provide 
the guaranteed, or certain, installments payable for 
twenty years. 

The difference between $1,000 and $612.96, or 
$387.04, is set aside by the company as a net single 

1 If vour table shows the present value of $i due at the end of each year, 
find the amount for $i due at the end of each year for 19 years, $14,324, 
and add $1 for the first payment. 


THE ORDINARY LIFE POLICY 273 

premium to provide for a deferred life annuity, to the 
beneficiary, of $40 a year, to start at the beginning of 
the twenty-first year after the insured’s death, if the 
beneficiary is living at that time, and to continue as 
long as she lives, ceasing at her death. 

Surplus Interest on Commuted Value . Under partici¬ 
pating 1 policies, as well as under some nonparticipating 
policies, excess interest above the reserve rate of 3 per 
cent, or 3 yl per cent, is paid on the commuted value 
of installments certain. No excess interest is paid, 
either during the twenty years certain or afterward, on 
that part of the insurance set aside for payment of the 
annuity in case the beneficiary lives longer than the 
twenty years certain. 

To illustrate the excess interest on a 3 per cent con¬ 
tinuous installment settlement with twenty years cer¬ 
tain: Assume that the beneficiary is 17 years old at 
the insured’s death. In the 3 per cent table shown 
above, the company sets aside 40 X $15,324, or $612.96 
for the twenty installments certain, and, at once, the 
first annual payment of $40 is made, leaving $572.96 
to earn interest for the installments certain during the 
first year. Three per cent must be added to the 
$572.96, since the installments were originally com¬ 
puted on the assumption that the $612.96 plus 3 per 
cent interest on the decreasing fund would provide $40 
a year, payable at the beginning of each year, for 
twenty years certain. The total of the twenty annual 
payments include both the principal of $612.96 and the 
annual interest of 3 per cent on the decreasing balance. 

^‘Participation” refers to participation by the policyholder in surplus 
earnings and savings and will be explained fully under “ Dividends.” 


274 LIFE INSURANCE FUNDAMENTALS 

But the excess interest earned, above 3 per cent, on 
the decreasing amount of the installment fund on hand 
from year to year and apportioned for distribution, is 
added to the annual Installment payments. This is 
called surplus interest. 

After the first annual payment of $40 is made out of 
the $612.96, the balance of $572.96 earns, say, 4 yZ per 
cent interest. After deduction of the reserve rate of 
3 per cent which must be added to the fund, the excess 
or surplus, interest of per cent will be added to the 
second annual installment payment at the beginning of 
the second year. One and one-half per cent on $572.96 
is $8.59, surplus interest, so that the total second pay¬ 
ment would be $48.59; $572.96 plus 3 per cent interest, 
or $590.15, less the second installment of $40, leaves 
$550. 1 5 to earn interest the second year. Surplus in¬ 
terest of 1 yi per cent on $550.15 would be $8.25 for 
the second year (to be paid with the third installment) 
as compared with $8.59 the first year. The interest 
continues to decrease as the installment fund is 
depleted. When the twentieth annual payment of 
$40 is made at the beginning of the twentieth 
year, the entire installment certain fund is exhausted. 
There is no money to earn interest, and, therefore, 
no surplus interest to pay at the end of the twen¬ 
tieth year. Surplus interest is earned and paid for 
nineteen years only. None is, of course, paid with the 
first installment. 

The amount of the installment certain fund at a 
given time is ike commuted value of the future install¬ 
ments certain; for it is that fund which, with the 
reserve rate of interest (3 per cent in this case), will 


THE ORDINARY LIFE POLICY 275 

provide for the balance of the twenty years’ install¬ 
ments certain. The commuted value at any time during 
the twenty years is the present value of the unpaid install¬ 
ments certain . 

Installments in Different Companies. Different com¬ 
panies have different practices with regard to fixing the 
amounts of the installments. An exact figure to the 
cent is quoted by some companies for each age; but, 
as the difference between the amounts is so very slight 
for certain successive ages, some companies give round 
figures, the nearest dollars. Others quote round figures 
for groups of ages, using approximate averages for each 
group, as in the tables shown on page 270. Students 
will also find slight differences in the continuous install¬ 
ment amounts for different companies using the same 
reserve interest rate, due to slight differences in the mor¬ 
tality tables used. Special tables based on the mor¬ 
tality of annuitants are commonly used in annuity 
computations and are sometimes used for the con¬ 
tinuous installments, because the payments after 
the installments certain are deferred annuities. Some 
companies quote “continuous installments” with¬ 
out any installments certain; these are life annuities, 
based on the age of the beneficiary at the insured’s 
death. 

Some companies grant continuous installments with 
ten, fifteen, twenty-five, and thirty installments cer¬ 
tain, as well as twenty. 

Payments to Contingent Beneficiary. The two preced¬ 
ing income settlements, interest and the continuous in¬ 
stallment, provide a means of establishing an income 
payable to the beneficiary as long as she lives, with the 


276 LIFE INSURANCE FUNDAMENTALS 

following provisions for a contingent beneficiary : 1 When¬ 
ever the original beneficiary of an interest-income dies, 
the contingent beneficiary will be entitled to receive the 
entire amount of the principal— i.e., the original pro¬ 
ceeds of the insurance; or the insured may have had 
the interest paid throughout the lifetime of the contin¬ 
gent beneficiary, the original principal being payable, 
at her death, to her estate. 

However, under the continuous-installment income, 
the time of the death of the original beneficiary deter¬ 
mines what will be received by the contingent bene¬ 
ficiary. For example, if the original beneficiary dies 
after drawing five of the twenty annual installments 
certain, the contingent beneficiary, say her daughter, 
will be entitled to receive the installment income for 
fifteen years; if the beneficiary dies after receiving the 
installments for eighteen years, the contingent bene¬ 
ficiary will receive payments for the remaining two 
years only. If there is no contingent beneficiary, the 
original beneficiary’s estate will, ordinarily, be entitled 
to receive the commuted value of the remaining install¬ 
ments certain. 

Limited Installments . Sometimes the amount of in¬ 
surance is not sufficient to furnish an adequate income 
for life. From the above 3 per cent continuous install¬ 
ment table we see that #10,000 will yield an annual 
income of #490 for the beneficiary’s entire lifetime, if 
she is 40 years old at the insured’s death. But the 
insured may feel that it would be better for her to have 


1 A contingent beneficiary is one appointed to receive the benefits of the 
policy in case of the death of the original beneficiary before she has received 
any, or all, of the proceeds of the policy. 


THE ORDINARY LIFE POLICY 


2 77 

a larger income for a shorter period, perhaps ten or fif¬ 
teen years; or, a father wishes to have his son receive 
an educational income to run for five years. Such 
needs for a fixed income, for a limited time, composed 
of principal and interest, are provided for through the 
use of “limited installments Tables of 3 per cent and 
3/^ per cent annual installments per $1,000 of insur¬ 
ance limited to various periods of years follow: 


No. Yrs. 

3 Per Cent 

3^ Per Cent 

No. Yrs. 

3 Per Cent 

3^ Per Cent 

2 

£ 5 ° 7-39 

$508.60 

16 

$77.29 

$79.89 

3 

343-23 

344.86 

17 

73-74 

76.37 

4 

261.19 

263.05 

18 

70-59 

73-25 

S 

211.99 

213.99 

19 

67.78 

70.47 




20 

65.26 

67.98 

6 

179.22' 

181.32 




7 

I 55-83 

158.01 

21 

62.98 

65-74 

8 

138.31 

140.56 

22 

60.92 

63.70 

9 

124.69 

127.00 

23 

59-04 

61.85 

10 

113.82 

116.18 

24 

57-33 

60.17 




25 

55-76 

58.62 

11 

104-93 

107-34 

26 



12 

97-54 

99.98 

54-31 

57.20 

13 

91.29 

93-78 

27 

52-97 

55-90 

14 

85-95 

88.47 

28 

51.74 

54.69 

IS 

81-33 

83.89 

29 

50.60 

53-57 




30 

49-53 

52.53 


The limited installments are very useful in many dif¬ 
ferent situations. For example, a father whose children 
are small, say three and five years old, has provided a 
life income to his wife of $600 a year, but he wants to 
increase this to about $1,200 a year until the children 
are grown; $10,000 additional insurance settled in lim¬ 
ited installments for twenty years will provide $652.60 
a year (3 per cent) until the children are 23 and 25 
years old, respectively. If the father is alive five years 
later, he may change the settlement from twenty years 












278 LIFE INSURANCE FUNDAMENTALS 

to fifteen years. The children are 8 and io years old 
now; $10,000 will provide $813.20 a year for fifteen 
years, and the total income of the wife until the chil¬ 
dren were grown will be over $1,400 a year instead of 
about $1,250. If the father is alive after another 
period of four or five years, he may wish to substitute 
the ten-year installments for the fifteen; in this case, 
at his death his $10,000 will provide $1,138.20 a year 
for ten years. This with the $600 a year which his 
wife will receive for life will give her an income of 
$1,738.20 a year until the children are grown. There 
may also be surplus interest. 

Limited Installments Are Installments Certain. If the 
beneficiary died after receiving only one installment from 
a limited installment income payable for twenty years, 
the contingent beneficiary would be entitled to nine¬ 
teen annual payments; or if there were no contingent 
beneficiary, the original beneficiary's estate would receive 
the commuted value of the unpaid nineteen installments. 

Surplus interest on limited installments , if any, is paid 
in addition to the guaranteed income throughout the 
entire period. Surplus interest is larger per $1,000 of 
insurance under the limited installments than under 
the continuous installment income. For, each $1,000 
is entirely devoted to paying the twenty-year certain 
income under the limited installments, whereas under 
the continuous installments each $1,000 is divided into 
two funds— e.g.y as has already been shown, for bene¬ 
ficiaries aged 17 at the insured’s death, the $40 continu¬ 
ous installment for twenty years certain requires a fund 
of only $612.96, the balance of the insurance of $1,000, 
viz., of $387.04, being used to buy a deferred life an- 


THE ORDINARY LIFE POLICY 279 

nuity of $40 for the beneficiary, beginning twenty years 
after the insured’s death. 

Under the limited installments for twenty years, the 
first payment (3 per cent) would be #65.26; #1,000 less 
#65.26 leaves #934.74, to be invested the first year. If 
the excess interest rate is \ x / 2 per cent, the amount of 
surplus interest for the first year will be ipZ per cent of 
#934.74, or #14.02, making the first year’s income, per 
#1,000 of insurance, #79.28, or #792.80 on #10.000. The 
second year’s interest is determined as follows: #934.74 
invested the first year at 3 per cent amounts to #934.74 
+#28.04, or #962.78. Deduct the second installment 
of #65.26, and we have #897.52 to invest the second 
year. The surplus interest for the second year would 
be per cent of #897.52, or #13.46, which is 56 cents 
less than the first year’s surplus interest. The excess 
interest decreases constantly. At the beginning of the 
nineteenth year the fund contains only #63.36, which, 
with 3 per cent interest, #1.90, will amount to #65.26 
at the end of the year, with which to pay the final 
annual installment at the beginning of the twentieth 
year. The surplus interest payable with the final in¬ 
stallment is 1 yi per cent of #63.36, or 95 cents. As 
the last of the fund is paid out at the beginning of 
the twentieth year, there is no surplus interest for the 
twentieth year. 

Monthly Payments. Of course, a monthly income is 
more desirable than an annual, semiannual, or quar¬ 
terly one. As a general rule, companies will pay the 
annual installments in monthly parts both on the lim¬ 
ited and on the continuous installment plans. There 
are two methods of fixing the monthly payments: 



280 LIFE INSURANCE FUNDAMENTALS 

first, simply to divide the annual installment by 12— 
e.g.y $65.26-7-12=^5.44, and, secondly, to pay the 
monthly pro rata , say, #5.44, plus monthly interest on 
the deferred monthly payments. 

The annual installment is due at the beginning of the 
year , the first annual payment being due at the insured's 
death; but if this is to be disbursed in monthly pay¬ 
ments, the company would pay one-twelfth at the in¬ 
sured's death and hold eleven-twelfths of the annual 
payment one month until the date of the second pay¬ 
ment, ten-twelfths the second month, nine-twelfths the 
third month, etc., and, finally, one-twelfth during the 
eleventh month, the twelfth monthly payment being 
made at the beginning of the twelfth month. 

The sum of the monthly interest on the deferred 
monthly payments of $5.44 for the eleven months at 
3 per cent (the reserve rate) is between 89 cents and 
90 cents, which, divided by twelve gives nearer 7 cents 
than 8 cents average per month in interest. One-twelfth 
of the annual installment is $5.44. ' This added to the 
average monthly interest, makes a total monthly pay¬ 
ment of $5.51 +. Some 3 per cent policies state that the 
monthly payment may be derived from any annual in¬ 
stallment by multiplying the annual amount by the 
factor .0845. This factor can be found from the above 
figures, as follows: $65.26 : 5.51 :: 100 : x. Therefore, 

551 + -r-65.26 =$8.45 per $100, or .0845 of $100; and 
.0845 times any 3 per cent annual installment will give 
the monthly payment, if the company allows interest 
on the deferred monthly installments. 

The companies which do not allow interest on de¬ 
ferred monthly installments take the reasonable posi- 


THE ORDINARY LIFE POLICY 281 

tion that the small amount of the monthly interest is 
not too much, on the average, to compensate for the 
extra clerical labor, postage, stationery, etc., involved 
in disbursing twelve monthly payments a year instead 
of only one annual payment. 

In case of monthly payments, instead of the annual 
installments, there will, of course, be a little interest 
paid for the twentieth year, viz., the excess interest on 
the deferred monthly installments paid in that year. 

Beneficiaries . If the purpose of the insurance is to 
provide cash for the insured’s estate, the policy should 
be written payable to the insured’s ‘‘executors, admin¬ 
istrators, or assigns.” But if the insurance is intended 
specifically for the use of a certain person, that person 
should be named as beneficiary; otherwise the insur¬ 
ance will be paid to the insured’s estate and will be 
subject, as a part of his estate, to any claims against 
it. As a rule, the proceeds of an insurance payable to 
a named beneficiary is exempt from the claims of the 
insured’s creditors, though in some states the exemp¬ 
tion is limited to the amount of insurance carried by a 
maximum amount of premiums. 

The first beneficiary named in a policy is called the 
original beneficiary; a second beneficiary to whom the 
insurance proceeds would be paid in case of the prior 
death of the original beneficiary is known as the con¬ 
tingent beneficiary , since his, or her, interest is contin¬ 
gent on the original beneficiary’s death. If the insured 
changes the beneficiary and substitutes the name of 
another person for that of the original beneficiary, such 
person is called the substitute beneficiary. 

A beneficiary may be named with, or without , the right 


282 LIFE INSURANCE FUNDAMENTALS 

of the insured to change , or revoke , his choice of bene¬ 
ficiary. If such right is reserved, the insured is the 
owner of the policy and controls it in every way; he 
may borrow on it or obtain the cash value upon his 
own signature alone. But if such right is not reserved, 
the beneficiary may not be changed without the bene¬ 
ficiary’s consent, nor a loan obtained, nor the cash 
value secured without the joint signatures of the in¬ 
sured and the beneficiary. 

Request for a change of beneficiary must be made in 
writing by the insured, and, usually, will not be effective 
unless it is filed with the company and the change in¬ 
dorsed on the policy during the insured’s lifetime. 
However, occasionally a policy may contain a clause 
like the following: “No such designation, revocation, 
change, or direction shall be effective unless duly made 
in writing and filed at the home office (accompanied 
by this policy for suitable indorsement) prior to or at 
the time this policy shall become payable.” 

Any change of beneficiary is subject to the rights of 
any person to whom the policy may have been as¬ 
signed— i.e . 9 the assignee. 

If no beneficiary named in the policy survives the 
insured, the policy is payable to his estate— i.e. y to his 
executors, administrators, or assigns, except that, if an 
irrevocable beneficiary has been named, the insurance 
will be payable to her estate, unless the policy specifi¬ 
cally provides otherwise. Some policies contain a clause 
like the following: “If any beneficiary, revocable or ir¬ 
revocable, dies before the insured, the interest of the 
beneficiary shall vest in the insured, unless otherwise 
specifically provided.” 



CHAPTER XXI 


NONFORFEITURE VALUES—PREMIUMS—DISABILITY- 
DOUBLE INDEMNITY—MISCELLANEOUS 

W HILE reading this chapter, the student will find 
it much easier to follow the text, if he will keep 
constantly before him the table of surrender values in 
an ordinary life policy. 

At the end of one, two, or three years the policy has 
a cash value, for which the insured may exchange, or 
surrender, his policy on his own signature alone, if he 
has reserved the right to change the beneficiary and 
if the policy is not assigned; but, as stated above, if 
he has designated the beneficiary irrevocably, he can¬ 
not secure the cash value without the beneficiary’s 
consent. Some policies state that the policy may be 
surrendered “by the united act of all parties having 
any interest or ownership” in it. This reference may 
include the insured, the beneficiary, and any assignee, 
as well as the estate of an irrevocable beneficiary who 
has died. 

The Net Cash Value. The amount payable as a 
cash value is the net cash value , which is the cash 
value stated in the table of surrender values, plus the 
cash value of any paid-up additions, less any indebted¬ 
ness of the policy, including both loans and interest. 
If the tabular cash value of a policy, at a given time, 
were #200, the cash value of paid-up additions $20, and 

283 


284 LIFE INSURANCE FUNDAMENTALS 

the amount of a loan #50, with unpaid interest of #5, 
the net cash value of the policy would be #220—$55, or 
#165. 

The insured may wish to discontinue paying pre¬ 
miums, but he may desire further insurance rather 
than to take his cash value. In this case the company 
will retain the cash value as a net single premium, 
granting in exchange for it extended or paid-up in¬ 
surance , as has been explained under nonforfeiture 
values in the section on “principles.” The amounts 
of extended and paid-up insurance for various years 
will be as given in the table in the policy for each 
#1,000 of the original insurance, if there are no paid-up 
additions and no indebtedness against the policy. 

If there is a debit against the policy of money loaned or 
interest , the extended or paid-up insurance will not be 
the same as the tabular figures; for the amount of money 
used as a single premium to buy either the extended or 
the paid-up insurance will of course, be only the net 
cash value of the policy. Suppose a #1,000 policy has 
a cash value of #200 and that there is a loan against 
it amounting to #50. The net value of the policy is 
#150, and the insured may have this in cash or he may 
have either #150 worth of extended insurance or #150 
worth of paid-up insurance. 

Paid-up Insurance. The amount of the paid-up 
insurance will be such as #150 will buy as a net single 
premium on the whole-life plan, the same kind of 
insurance as the ordinary life, except that it is paid-up 
for life. (An example of computing paid-up insurance 
is given in the section on principles.) 

Extended Insurance. The amount of the extended 


NONFORFEITURE VALUES 285 

insurance will, in most companies, be $1,000 less the 
indebtedness of $50, or $95°- The term will, therefore, 
be such as the net cash value of $150 will purchase for 
an insurance of $95°* I n rare instances, a company 
makes the amount of extended insurance the same as 
the face of the policy. If this were the case, the term 
of the extended insurance would be such as the net 
cash value would buy for an insurance of $1,000; thus 
the term would be shorter than it would be if the in¬ 
surance were only $950. 

Students often raise this question: “The $50 of 
indebtedness is deducted from the cash value of $200, 
leaving only $150 as the net cash value for the pur¬ 
chase of extended insurance. Is it fair also to reduce 
the amount of the extended insurance by deducting 
$50 from the original amount of insurance, $1,000, 
leaving only $950 of insurance? Isn’t the $50 taken 
away from the policyholder twice? ” 

If the policyholder had taken his value in cash and 
surrendered his policy, he would have received $150; 
so it is clear that $150 is all the money due him, and 
that it is the proper amount to use as a net single 
premium for the purchase of extended or paid-up 
insurance. Suppose, on the other hand, that he had 
died while there was an indebtedness of $50, and while 
the policy was still in full force; the company would 
have paid his beneficiary only $950, the face of the 
policy less the indebtedness. But a total of $1,000 
would have been paid, since the policyholder received 
$50 from the company when he secured the loan. 

Thus, if we grant an extended insurance of $950 
for as long as the net cash value of $150 will buy, we 


286 LIFE INSURANCE FUNDAMENTALS 

are granting the same amount of insurance the bene¬ 
ficiary would have received had the insured died while 
the policy was in full force with a loan of $50 against it 
and are allowing the entire net cash value of $150 as the 
purchase price. 

Of course, if the extended insurance is granted for 
$1,000, the term will have to be less and the student 
may say that the company is as well off to carry $1,000 
of insurance for a shorter term, as it would be to carry 
$950 of insurance for a longer period. 

But the company should never increase its amount at 
risk (see page 195) without evidence of insurability . 
Assuming that the tabular cash value of $200 is the 
full reserve on the ordinary life policy for $1,000, then 
the amount at risk is $1,000—$200, or $800. The 
company should not increase its amount at risk above 
$800 without evidence of good health, etc. If the term 
insurance is made $950 and the net cash value, which 
is used as the single premium, is $150, the amount at 
risk at the time the extended insurance becomes 
effective is $950—$150, or $800, just what it would 
have been had there been no loan on the policy; for 
in that case the amount at risk would have been $1,000, 
less the full reserve of $200, or $800. On the other 
hand, if the extended insurance should be fixed at 
$1,000, despite the loan of $50, then the amount at 
risk at that time will be $1,000, less $150, or $850— 
L<?., greater than it would have been had the policy 
been continued in full force. 

The cash value of paid-up additions increases the 
net cash value of the policy, increasing, therefore, the 
amount of the single premium to purchase extended 


NONFORFEITURE VALUES 287 

term insurance. When there are paid-up additions, 
the amount of the extended insurance is increased by 
the amount of the paid-up additions. The term is 
such as the net cash value will buy for the total amount 
of insurance. If a $1,000 policy has a cash value of 
#200 and paid-up additions of $100 whose cash value 
is $50, the amount of extended insurance will be 
$1,100; and the term will be as long as $250 will carry 
the $1,100, at the attained age of the insured. 

Cash values of paid-up and extended insurance. The 
full reserve on paid-up or extended insurance is usually 
granted as a cash value. The cash value on the paid- 
up insurance increases constantly, and at age 96 is 
equal to the amount of the paid-up insurance. The 
cash value of the extended insurance constantly 
decreases, being zero at the end of the term; for the 
extended insurance is single-premium term insurance, 
the reserve on which is being used up from year to 
year to carry the insurance. 

Automatic Paid-up or Extended Insurance. The 
insured may have his choice of having extended or 
paid-up insurance become effective, if he lapses his 
policy— i.e., ceases to pay his premiums as they fall 
due. In case he makes no written selection, one form 
or the other must nevertheless be used upon lapse of 
the policy. Therefore, one form or the other is made 
“automatic” by a provision of the policy. The auto¬ 
matic form will go into force at the end of a certain 
number of days after the due date of the unpaid pre¬ 
mium, usually sixty to sixty-two days; during this 
period the policyholder has the right to surrender 
the policy for the cash value of the policy, or to desig- 



288 LIFE INSURANCE FUNDAMENTALS 

nate paid-up or extended insurance. The automatic 
plan provided in the policies of a given company may 
have been selected by the company or it may be 
required by law. Sometimes a beginner is struck by 
the similarity in certain policy provisions of companies 
located in the same state, not realizing that various 
states have prescribed standard policy provisions. 
There are also in some states laws requiring that 
policies delivered within the state shall offer extended 
insurance as the automatic nonforfeiture provision. 

Loans. One of the modern developments in life 
insurance is the loan privilege, by which the policy¬ 
holder is given the right to borrow against the cash 
value of his policy, unless it is already assigned. The 
policy itself is the sole security for the loan and must 
be assigned and delivered to the company. Either the 
policy will remain with the company as security until 
the loan is repaid, or in some companies, the loan will 
be indorsed on the policy and the policy returned to 
the policyholder. In either case the cash values, as 
well as the amount of the insurance, are subject to 
reduction if the loan is not repaid, exactly as a bank 
would pay to a borrower only his equity in a bond 
deposited as collateral for a loan in default. It is the 
rule to require the signature of the beneficiary in 
granting a policy loan, though some policies provide 
that the beneficiary need not sign unless she has been 
designated irrevocably. 

The usual rate of interest on loans against the cash 
value in policies issued at the present time is 6 per cent, 
though some companies charge 5^ per cent, and a 
few only 5 per cent. Some charge the interest in 


NONFORFEITURE VALUES 289 

advance, others at the end of the year. In some policies 
the rate is fixed at 6 per cent, but in others the rate is 
stated as “not more than (or not exceeding) 6 per cent.” 
A few years ago the interest was usually less than 6 
per cent. Five per cent was quite common, and there 
are still in force policies for millions of dollars of in¬ 
surance which require only 5 per cent interest. Even 
if the company has since raised the interest in new 
policies, it cannot charge over 5 per cent to those 
whose policies quote 5 per cent as the rate of interest. 

Tabular Loan Values. The table of cash values shows 
also the “loan values”— i.e., the amounts that may 
be borrowed against the cash value of each $1,000 of 
insurance. In some cases the same amounts are quoted 
both for the cash values and for the loan values; in 
other policies separate columns are given, showing 
smaller amounts for the loan values than for the cash 
values. On page 290 are the tables of cash and loan 
values for two companies, both of w T hich are on the 3 
per cent reserve basis. 

Company A and Company B have the same cash 
values. 

Company A designates its cash values as “Loan and 
Cash Values.” But with this heading, we must also 
read the subheading, viz., “The Loan Value is the Cash 
Value less interest to the premium anniversary date.” 
Both of these companies charge 6 per cent interest on 
loans. If the full current year’s premium has been 
paid, Company A will loan the cash value available at 
the end of the year, less 6 per cent interest from the 
time the loan is made to the end of the year. This 
procedure results in nearly the same loan values as are 


290 LIFE INSURANCE FUNDAMENTALS 


Table of Cash and Loan Values in Companies A and B, Twenty-Payment Life 

Policy, 3 Per Cent, age at Issue, 35 


Company A 

Company B 

Cash and Loan Values 

Cash Values 

Loan Values 

After 
Policy 
has been 
in Force 

Loan and Cash 
Value for Each 
$1,000 of Face Amount 
of Policy 

The Loan Value is the 
Cash Value less in¬ 
terest to the premi¬ 
um anniversary date. 

vv 

After 
Policy 
has been 
in Force 

Cash 

Surrender Value 
for Each $1,000 
of the 

Face Amount 

Years’ 

Pre¬ 

miums 

Paid 

Loan 

Value 

3 

Years 

$55 

3 Years 

$55 

3 

$51 

4 

a 

79 

4 

a 

79 

4 

74 

5 

a 

107 

5 

u 

107 

5 

100 

6 

u 

133 

6 

a 

133 

6 

125 

7 

u 

162 

7 

a 

162 

7 

152 

8 

a 

192 

8 

a 

192 

S 

181 

9 

u 

223 

9 

u 

223 

9 

210 

10 

a 

255 

10 

a 

255 

10 

240 

11 

u 

286 

11 

a 

286 

11 

269 

12 

u 

317 

12 

u 

317 

12 

299 

13 

a 

350 

13 

a 

350 

13 

330 

14 

u 

383 

14 

a 

383 

14 

361 

15 

a 

418 

15 

a 

418 

15 

394 

16 

a 

454 

16 

a 

454 

16 

428 

17 

« 

491 

17 

a 

491 

17 

463 

18 

u 

529 

IS 

a 

529 

18 

499 

19 

u 

568 

19 

a 

568 

19 

535 

20 

u 

609 

20 

u 

609 

20 

574 

21 

a 

621 

21 

u 

621 

21 

585 

22 

0 

632 

22 

a 

632 

22 

596 

23 

u 

643 

23 

a 

643 

23 

606 

24 

a 

655 

24 

u 

655 

24 

617 

25 

a 

666 

25 

a 

666 

25 

628 


allowed in Company B’s table— e,g.> Company B’s 
cash value at the end of the third year is #55 per 
$i,ooo of insurance; its loan value is $51. Company 
A would loan at the beginning of the year $55, less 
6 per cent interest, which would be $51.89. If the loan 
were desired just in the middle of the year, the amount 
would be $55, less 6 per cent interest for six months, a 
trifle more than would be loaned at the beginning of 
the year. 

In case of participating policies, since the total cash 
value includes the cash value of any paid-up additions, 
the loan values are increased accordingly. 
























NONFORFEITURE VALUES 291 

Guaranteeing Collection of Interest. In either case, 
the company’s purpose in loaning less than the cash 
value is to make sure it will be able to collect the 
interest when it is due. If the money had not been 
loaned to the policyholder, it would have been in¬ 
vested and would have earned interest. The policy¬ 
holder’s funds must be constantly earning interest in 
order that the company may be able to meet its lia¬ 
bilities. The difference between the amounts loaned 
by A and B is slight. A prefers to loan the exact 
amount of the cash value less the interest for the time 
of the loan. Company B considers it more expedient 
to print in round figures the amount it will loan, so that 
the policyholder can see it for himself without having 
to inquire what amount he can borrow, and so as to 
minimize the work of fixing the amount of the loan 
value in each case. 

Net Loan Values. Sometimes a loan is desired at a 
time when a previous loan against the same policy is 
still outstanding. There may also be unpaid interest 
charged against the policy. In such a case, the net 
loan values would be the tabular cash value plus the 
cash value of any paid-up additions, less the old loan 
and less, also, the amount of interest that will be due at 
the end of the year on both the old loan and the new 
one, including any overdue interest on the old loan. 

Failure to pay interest when due does not avoid the 
policy, so long as the total cash value covers the sum 
of the loan and accrued interest. In accordance with 
some state laws, if the time comes‘when the total cash 
value is not sufficient to cover the total amount of the 
indebtedness, the company must wait for at least 


292 LIFE INSURANCE FUNDAMENTALS 

thirty days after notifying the policyholder of the 
status of his policy account before it may cancel the 
insurance. 

Any loans made at a time when there are install¬ 
ments of the year’s premiums yet to be paid shall be 
subject to deduction of the unpaid portion of the 
premium; the cash and loan values printed in the 
table are fixed on the assumption that the full annual 
premium will be paid. 

Loans may be repaid at any time of the year in whole 
or in partial payments. 

Loans Under Paid-up and Extended Insurance. 
Loans are granted on paid-up insurance but not on 
extended insurance. Paid-up insurance is excellent 
collateral for loans, because the reserve is constantly 
being increased by the addition of interest. The 
margin of safety above the loan grows larger and larger. 
But the reserve on the extended insurance might not 
be satisfactory security; for extended insurance is 
single-premium term insurance and the reserve de¬ 
creases every year. If a company loaned the maximum 
on the terminal reserve in a given year, it would be 
necessary to close out the extended insurance at the 
end of the year unless the loan were repaid, for the 
next year’s terminal reserve would not be sufficient to 
protect the loan. 

PREMIUMS 

Convenience in Premium Payments. Companies 
make reasonable provision for the convenient payment 
of premiums. The full annual premium is due at the 
beginning of each year . However, it may be paid in 


PREMIUMS 293 

semiannual or quarterly installments , commonly called 
semiannual or quarterly premiums. Since the full 
year’s premium is due at the beginning of the year, if a 
policyholder who has been paying semiannually or 
quarterly dies before the full year’s payment has been 
made, any unpaid premium installments will, of course, 
de deducted in settlement of the death claim. 

Premium Installments . In this connection, it should 
be noted that the sum of two semiannual install¬ 
ments is greater than the annual premium, and that 
the sum of four quarterly installments is still greater, 
for two reasons: first, the company is entitled to interest 
on the deferred payments, and, secondly, it costs at 
least twice as much to collect semiannually, and four 
times as much to collect quarterly, as it does to collect 
once a year; probably even more than twice or four 
times as much. The amounts of the semiannual and 
quarterly installments are arrived at by adding per¬ 
centages to the annual premium and dividing by 2 
and 4, respectively. For example, in a certain com¬ 
pany the annual premium at age 35 is $27.83; to get the 
semiannual installment, add 4 per cent and divide 
by 2: $27.83 -f$i.u =$28.94 — 2 =$14.47; the 

quarterly installment is the annual rate plus 6 per cent 
divided by 4 : $27.83 + $1.67 = $29.50 4- 4 = $7.38. 
Some companies add 2 and 3 per cent instead of 4 and 6. 

Change from annual payments to quarterly or semi¬ 
annual payments may be made to suit the insured’s 
convenience. Change in the anniversary date of the 
premium may also be arranged. 

Days of Grace. Thirty-one days of grace (or one 
month), are allowed after the due date of the premium 


294 LIFE INSURANCE FUNDAMENTALS 

in which to make payment. If the insured dies during 
the days of grace, the amount of the current year’s 
premium remaining unpaid must be deducted from the 
amount of insurance. 

Automatic Premium Loan. It frequently happens 
that a policyholder is unable to meet his premium 
payments or deposits without borrowing the money. 
Loans against the cash value are often made for this 
purpose. By borrowing on his policy, the insured 
keeps his original policy in force, though the face 
amount is reduced by the amount of the loan. Yet 
he may repay the loan and have his insurance just as 
it was originally. Sometimes, no doubt, the owner of 
a lapsed policy regrets that the original insurance is 
not in force. He may even have become uninsurable 
and is, therefore, unable to reinstate his policy. If 
he had borrowed on his cash value to pay the premi¬ 
ums for a while, his financial condition might, a little 
later, have made it possible to resume payments and 
maintain the original insurance in force, and, perhaps, 
still later, to repay the loan and again have the face 
amount of insurance in force. Also, a policy sometimes 
lapses through oversight or carelessness. 

With these needs in view, many of the life-insurance 
companies have inserted in their policies an automatic 
premium loan clause , automatic in the sense that it 
becomes automatic, if the insured so requests. For 
example, a policyholder whose policy contains such a 
clause requests the company in writing to have the 
premium loan clause made effective automatically in 
case he fails to pay any premium when due. If, after 
this request has been made in writing, he fails to pay 


PREMIUMS 


295 

a premium, the company will, if his loan value is suf¬ 
ficient, charge his cash value account with the amount 
of the premium without any further action on his part. 
Interest not paid will also be charged to the account 
and the insurance will be continued as long as the cash 
value is sufficient to cover the amount of premiums 
loaned and accrued interest. 

The loan value may be less than a due annual pre¬ 
mium, yet sufficient to pay a semiannual installment 
of the premium, or at least large enough to pay a 
quarterly installment. In such case the company will 
pay the larger installment if possible; if not, it will 
pay the quarterly one. Thereafter, if a semiannual 
installment was paid, premium notices will usually 
be sent semiannually, or they will be sent quarterly in 
case a quarterly installment was paid, until the insured 
requests a change back to the annual payment basis. 

Each payment of premium by premium loan de¬ 
creases the net amount of the insurance. It both adds 
to and substracts from the cash value; for payment of 
each premium increases the cash value, yet the amount 
of the premium payment and accrued interest must be 
charged against it. 

Premium Loan a Nonforfeiture Provision. When the 
sum of premiums so paid and the accrued interest is so 
large as to exhaust the cash value, the policy lapses, 
and, as there is no cash value left, there will be no 
extended or paid-up insurance— i.e., the policy becomes 
entirely void. Thus, the automatic premium loan is 
somewhat similar to extended insurance in that, upon 
failure of the insured to pay his premium, the insur¬ 
ance is continued for as long a time as the cash value 



296 LIFE INSURANCE FUNDAMENTALS 

will carry it, the insurance expiring at the end of such 
time. But there are two important differences between 
the premium loan plan and the extended insurance: (i) 
the amount of insurance under the extended insurance 
is for the face of the policy (if there was no loan prior 
to lapse), while the insurance under the premium- 
loan plan is constantly diminished; (2) the extended 
insurance is term insurance effective upon lapse of the 
policy, while, under the premium-loan plan, the 
original ordinary life policy does not lapse, but is 
continued in force. Thus, if the insured has become 
uninsurable, he may restore his insurance, under the 
premium-loan plan, to its original status by repaying 
the indebtedness and without having to give any 
evidence of insurability, so long as the cash value is 
not exhausted. 

Obviously, if the insured requests the premium loan, 
he elects an option which is in lieu of extended and paid- 
up insurance, so that the automatic premium loan is in 
reality one of the nonforfeiture options, and is so 
classified in Australian policies. 

Assignment of the policy is not required for the pre¬ 
mium loan, nor must the policy be delivered to the 
company either as collateral or for indorsement. But 
the insured has given his written request for the auto¬ 
matic premium loan, which is-the company’s authority 
for charging the loans and interest to the insured’s 
policy account. 

TOTAL AND PERMANENT DISABILITY 

Disability Provisions. Two provisions are commonly 
made for “total and permanent disability.” 


DISABILITY 297 

(1) If the Insured becomes totally and, presumably, 
permanently disabled by disease or injury, while his 
policy is in full force, then, as long as he remains totally 
disabled and is on this account unable to earn a living, 
his future premiums will he waived —that is, they will be 
paid for him out of the company’s disability reserves, 
accumulated for this purpose from the very small 
extra premium added to the insurance premium for the 
premium waiver. 

(2) Under a life policy, the insured may, in most 
companies, also receive a monthly income as long as he 
lives and remains totally disabled and is prevented 
from earning a living. Under some endowment policies 
the disability income is paid only to the end of the 
endowment period, at which time, of course, the in¬ 
sured receives his endowment payment in cash or 
income, as he may prefer. Other companies pay the 
disability income, under endowment policies for life, 
even though the endowment may mature and be paid 
in cash. Usually the disability income is one per cent 
monthly of the face of the policy. 

The disability income is paid out of special dis¬ 
ability reserves accumulated for this purpose. A very 
slight premium is added to the ordinary life premium 
for the waiver and a somewhat larger, though really 
small, premium is added for the disability income. 
These little additional premiums collected from the 
large group of policyholders, with interest, are used to 
create a reserve from which disability benefits are paid. 

Phraseology of Disability Clause. The phraseology 
in the disability clauses, “permanently, continuously 
and wholly prevented thereby from performing work, or 


298 LIFE INSURANCE FUNDAMENTALS 

engaging in any occupation, for compensation or 
profit,” or similar language, makes it difficult for any 
legal defense to be set up against the company in case 
it is clear to the company that a claim for total and 
permanent disability benefits is not a just one. The 
companies have been extremely liberal in their decisions 
and intend to allow every disability claim that seems, 
upon thorough investigation, to be a just one. It 
seems to be very difficult to draw a less drastic pro¬ 
vision which would clearly define the various con¬ 
ditions which might exist. 

The loss of both arms at or above the wrist, or of 
both legs at or above the ankle (some policies say 
the loss of the use of both arms or both legs) or of one 
hand and one foot, or loss of the sight of both eyes, 
is held to constitute total and permanent disability, 
even though the insured might be able to earn a large 
income. 

Effective Time of Disability Benefits. There are vari¬ 
ations in different policies as to the time when the dis¬ 
ability benefits may take effect. Some companies permit 
proof of total disability to be submitted immediately 
after it becomes known; others require that proof be 
furnished after total disability has existed for a certain 
length of time, usually sixty or ninety days. After 
receipt of due proof of total disability, some begin at 
once to apply the disability benefits; others will pay 
the disability income only after the expiration of a 
certain period, such as six months after receipt of proof 
of total disability. In a few instances, if total dis¬ 
ability continues for a certain period, such as ninety 
days, the disability is deemed to be permanent. 


DISABILITY 


299 

Annuity and Installments. Payment of income does 
not , usually , decrease the amount payable at death — e.g ., if 
the holder of a $10,000 policy became totally disabled 
while his policy was in full force and received $100 
a month for a number of years and then died, his 
beneficiary would receive $10,000, provided, of course, 
there was no indebtedness against the policy. The 
disability income payable without affecting the amount 
of the insurance is a monthly annuity. Some con¬ 
tracts provide for an installment income instead of the 
annuity— e.g., on a $10,000 policy, a monthly income 
of $100, payable until 100 such payments have been 
made (100 X $100 = $10,000). Under this plan the 
amount of the insurance is gradually disbursed. If 
the insured dies before the 100 monthly payments have 
been made, only the balance of the insurance is paid 
to the beneficiary. Of course, the premiums charged 
for the disability annuity are greater than those 
charged for the installment benefit. 

Since the premiums “waived” have really been 
paid out of the reserve accumulated from the dis¬ 
ability premiums paid by the policyholders, the 
ordinary life policy is treated exactly as if the insured 
had paid the premiums as before; cash values are in¬ 
creased the same as if the premiums had been regularly 
paid by the insured, and, sometimes, the same dividends 

are paid. 1 

Proof of Continued Disability. Although the com¬ 
pany may have accepted proof of total and permanent 

1 Some companies provide in their disability premiums for waiver of 
gross premiums, some for waiver of net premiums only. In the former 
case, there would be regular dividends^ in the latter case special disability 
dividends might be apportioned. 


300 LIFE INSURANCE FUNDAMENTALS 

disability, it reserves the right to require from year to 
year (but not oftener than once a year) that the insured 
furnish proof of the continuance of total disability , by 
certificate from a physician designated by, or accept¬ 
able to, the company. 

Miscellaneous. The most important miscellaneous 
provisions of the policy are as follows: 

Suicide. Suicide is a risk not assumed if it occurs 
within the first year, or, in some companies, the first or 
second year, of the insurance. Some companies pay 
nothing in case of suicide during the first year or the 
first and second years. Some refund the premiums 
that have been paid. Some pay the policy reserve. An 
exceptional provision is to the effect that the full amount 
of the insurance, otherwise payable, will be paid in 
event of suicide during the first year, if the company 
shall determine that the insured was so far insane as not 
to be responsible for his act. To insure against suicide 
without any restriction would be against the public 
interest, and would burden the company with an extra 
hazard. In setting up the restriction for one or two 
years, it is assumed that the majority of persons who 
contemplated suicide at the time they applied for in¬ 
surance would either have changed their minds or 
killed themselves before the end of the period, or that 
many who desired insurance in anticipation of suicide 
would not apply in view of the restriction. 

Incontestability. Another important provision is 
the one stipulating that after one year, or two years in 
some policies , the policy shall be incontestable for any 
cause except the nonpayment of premiums. The incon¬ 
testable privilege from the date of issue of the policy 


MISCELLANEOUS 301 

would be against public policy, as well as against the 
safety of the company, as it would practically invite 
fraud in the securing of insurance. But incontesta¬ 
bility after a certain period is reasonable, because the 
company has one, or two, years in which to investi¬ 
gate the conditions under which the insurance was 
secured and also because it is of very great importance 
to protect, as far as is expedient, the great number of 
beneficiaries, innocent parties, against the necessity 
of defending contested death claims, particularly since 
the insured would not be alive to present his side of the 
case. 

Reinstatement. A lapsed policy may be reinstated 
to its original conditions, if the insured furnishes 
satisfactory evidence that he is insurable, and pays 
overdue premiums and indebtedness with compound 
interest at 5 per cent, or 6 per cent, according to the 
company. Evidence of insurability may require a 
complete, or a partial, medical examination, depending 
on the case. In some instances, when the policy has 
been lapsed for only a brief time and the insured is 
known and seems to be in good health, a “ certificate of 
good health” from the examining physician, or even a 
“declaration of health” from the insured himself may 
suffice without a regular examination; but the com¬ 
pany has the right, as it should have, to require what¬ 
ever evidence of insurability may seem advisable, in¬ 
cluding a new report on the character, occupation, etc., 
of the person applying for reinstatement. If the policy 
is reinstated, any indebtedness against the policy may 
be reinstated also; otherwise, it must be paid off. 

Assignments. Original or duplicate copies of assign - 


302 LIFE INSURANCE FUNDAMENTALS 

merits of the policy are to be filed at the home office 
of the company, yet the company does not assume any 
responsibility for the validity of the assignment. 
Some policies state that assignments are subject to 
proof of interest, and in any case such proof would be 
required. There are different kinds of assignments, and 
the student should familiarize himself with the assign¬ 
ment blanks furnished by his company. In an abso¬ 
lute assignment, the insured assigns all his interest in 
the policy; he transfers the ownership of the policy to 
the assignee. In a collateral assignment, he assigns the 
policy only for the amount of the indebtedness covered, 
and reserves his equity. The insured, whose policy 
is payable to his estate, may appoint a beneficiary by 
assignment. For this purpose two forms are some¬ 
times used, a revocable assignment, which may be 
revoked, if the insured so wishes at any time, and the 
absolute assignment, by which the insured appoints 
the beneficiary irrevocably. 

Restrictions. Either in the application or the policy 
is usually to be found a provision regarding certain 
“restrictions.” Engaging in military or naval service 
or certain other hazardous undertakings or occupations 
may be specified as risks not covered during the first 
one or two years of the insurance. Aviation may not 
be insured against in the first year or two. In at least 
one case, if death results from aerial flight during the 
first or second years only the reserve on the policy 
will be paid to the beneficiary. Nowadays, American 
life insurance policies are singularly free from restric¬ 
tions; but in the early years of American life insurance, 
the policies were restricted in many ways. There were 


DOUBLE INDEMNITY 303 

a good many states of the Union in which travel was 
formerly excepted from the insurance protection. 

Double Indemnity. Double indemnity is an addition 
to life-insurance policies that has been made in recent 
years by certain companies, providing for payment of 
double the face of the policy, if the insured is killed by 
accident under specified conditions. Before the com¬ 
pany will pay the double benefit, it must be proven 
that the insured’s death resulted from bodily injury 
received by violent, external, and accidental means, and 
that such death occurred within sixty, or ninety, days 
after the date of such injury. In some policies, the 
double-indemnity provision does not apply, if the fatal 
accident occurs after the insured is sixty years old. 
Death by accident in military or naval service or by 
suicide is not included; and, in some cases, the double 
payment will not be made if death results from viola¬ 
tion of the law or from participating in aviation or sub¬ 
marine operations. Other exceptions may be included, 
such as death resulting from ptomaine poisoning or bac¬ 
terial infection. Another provision commonly found is 
that the extra payment will not be made unless there 
are wounds or contusions on the body, except in case 
of drowning. 


CHAPTER XXII 

DIVIDENDS 


I N the study of surplus, in the section on the prin¬ 
ciples of life insurance, it was stated that the larger 
loading for expenses and contingencies, provided in par¬ 
ticipating premiums, makes it possible to effect sav¬ 
ings in the allowance for expenses; that, 1 owing to the 
careful selection of risks, there is a saving in the funds 
maintained for mortality costs, especially in the first 
few years; and that 1 there are profits in interest, due to 
the fact that the company earns a higher rate of in¬ 
terest than is required to maintain its reserves. 

It was also explained that such savings and the 
profits from interest, together with any profits accru¬ 
ing from the increased value of investments and from 
surrender charges, constitute the current year’s sur¬ 
plus, and that this surplus is usually divided into two 
parts, one portion being added to the undivided sur¬ 
plus, and the balance being distributed among the 
policyholders of participating policies as “dividends,” 
while, in nonparticipating companies, it is used, in lieu 
of a larger loading, to assist in paying the expenses, 
and, also, the stock dividend. 

Dividends Cannot Be Predicted. One of the important 
sections of a participating policy is that which sets 
forth the conditions under which a policy shares in the 

1 In both participating and nonparticipating insurance. 

304 



DIVIDENDS 305 

divisible surplus and the different methods of paying 
or applying the dividend. In the first place, no divi¬ 
dends are promised, and this should be made clear to 
prospects by the agent. The company will distribute 
such surplus as may have been determined and appor¬ 
tioned by the officers and the directors or trustees of 
the company. The company cannot predict dividends 
with certainty, and the dividend scale will change from 
time to time in accordance with the company’s earning 
power, its mortality experience, and the costs of oper¬ 
ation. Yet it is a remarkable fact that there are prob¬ 
ably very, very few mercantile establishments or com¬ 
panies that have been able to obtain results in stock 
dividends or profits that equal or approach in regularity 
over a long period of years the results in surplus pay¬ 
ments obtained by life-insurance companies. We make 
no comparison of life-insurance surplus payments with 
stock dividends or business profits; they are quite dif¬ 
ferent things, and should, therefore, not be compared. 
The point is simply that life-insurance companies, al¬ 
though no promises are made as to surplus distribution, 
have a remarkable record as to the regularity of their 
surplus, or dividend, payments. 

This is a good place to say, also, that the American 
companies, both participating and nonparticipating, 
have established a fine name for American life insur¬ 
ance in the low cost of insurance over a long period 
of years. 

Annual Dividends. Divisible surplus is, nowadays, 
usually payable annually. A number of years ago divi¬ 
dends were to a very great extent paid at five-yearly 
intervals, or at the end of so-called distribution periods, 


306 LIFE INSURANCE FUNDAMENTALS 

ten, fifteen, or twenty years, under “deferred” divi¬ 
dend policies. But there is comparatively little de¬ 
ferred dividend insurance written to-day. The annual 
dividend prevails and is, indeed, prescribed by the laws 
of some states. 

Time of First Annual Dividend. The first dividend 
is paid at the end of the first, or second, year, depend¬ 
ing on the company. We have seen in our study of 
loading that the provision for expenses, in the gross 
premium, is not sufficient to pay the applicant’s way 
into the company, and that the company must borrow 
from its surplus, or, as it is sometimes expressed, from 
the old policyholders, enough to pay the excess of initial 
expenses over and above the first year’s loading. 

This fact introduces the question whether any sur¬ 
plus should be distributed at the end of the first policy 
year. In many underwriting problems there are, natu¬ 
rally, differences of opinion, just as there are among lead¬ 
ing jurists and physicians and engineers in legal and 
medical and engineering questions. Just as there is, 
frequently, more than one satisfactory solution to a 
problem in other fields, so, too, is it sometimes possible 
to solve life-underwriting problems by different meth¬ 
ods; although there are certain life-insurance problems 
which are so fundamental that life underwriters are 
unanimously (or practically so) agreed. For example, 
they agree that a low rate of interest must be used in 
net premium calculations. They disagree as to whether 
3 per cent or per cent is preferable. They agree in 
certain matters of medical selection; on others there 
may be differences of opinion. But, in the main, ex¬ 
perience has proven that there is sufficient harmony of 


DIVIDENDS 307 

opinion in matters both of theory and of practice, so 
that the business of life insurance as a whole is trans¬ 
acted on a sound basis. 

The real question in regard to first-year dividends is 
whether the new policyholder should wait longer than 
one year for a share in the divisible surplus, in view of 
the fact that his first premium does not cover his en¬ 
trance costs; or whether he ought to begin to receive 
dividends the first year, because the accession of new 
lives to the group of policyholders is of distinct benefit 
to the entire membership, and because experience 
seems to show that the first-year dividend encourages 
the new policyholder to pay his second premium. The 
answer to this question by distinguished underwriters 
differs; some companies pay the first dividend at the 
end of the first year, others at the end of the second 
year. 

Condition of First Dividend Payment. Another ques¬ 
tion arises in those companies that pay the first divi¬ 
dend at the end of the first year: Shall the first divi¬ 
dend be paid at the end of the first year, no matter 
whether the second premium is paid or not? Or, shall 
the payment be made at the end of the first year, only 
if the second premium is paid? This question, also, is 
answered in both ways by different companies. Such 
questions are sometimes so difficult to answer with a 
feeling of certainty that sometimes a company has an¬ 
swered the same question differently at different times 
— e.g., a number of years ago, a company which now 
pays the first dividend at the end of the first year dis¬ 
tributed no surplus until the end of the second year. 

It must be remembered that solving a problem from 


3 o8 LIFE INSURANCE FUNDAMENTALS 

a purely theoretical point of view and working it out 
with due consideration of all the practical points in¬ 
volved are quite different things. It is rather easy for 
companies to agree in theory; but so often it is neces¬ 
sary to choose a certain course of action rather than 
another, not merely because it seems a wise or expe¬ 
dient course, but because we can’t “eat our cake and 
have it, too.” In making one choice to gain a certain 
advantage, we may recognize that we are losing an¬ 
other advantage which the other procedure would 
afford. It is by no means always a case of selecting 
the only good way, but rather, very often, the choosing 
of what seems to the individual, or to a group of per¬ 
sons, in the light of experience as they interpret it, the 
better of two good methods; or, perhaps, sometimes, 
the lesser of two evils. 

Methods of Receiving the Dividends. The annual divi¬ 
dend, or share of divisible surplus, is (i) a cash pay¬ 
ment; but it may be received (2) as a cash credit, to 
reduce the amount of the annual premiums payment; 
or (3) in an equivalent of additional insurance; or (4) 
it may be left on deposit at interest. 

The insured has the right to choose the method of 
receiving surplus, which he prefers. If he makes no 
choice within a period varying from thirty to ninety 
days after the dividend becomes due, the company will 
pay the surplus in the manner prescribed in the policy. 
This is generally known as the automatic dividend option. 
It is interesting to note that each of the four different 
methods of paying surplus is prescribed, in various 
companies’ policies, as the automatic option. Some 
prescribe that, in case of no election, the surplus shall 


DIVIDENDS 309 

be paid in cash; others that it shall be taken as a cash 
credit to reduce the annual premium; others that it 
shall be used to buy additional insurance; while there 
are some which specify that it shall be left on deposit 
with the company at interest. 

The life-insurance laws of certain states stipulate the 
automatic surplus option. This is why, in some cases, 
the policies of all companies located in a certain state 
specify the purchase of additional insurance as the 
automatic option, while in another state they provide 
that if no choice is made, the dividend shall be left on 
deposit. Some policies say that if no choice has been 
made the surplus shall be paid in a specific way, “unless 
otherwise provided by law,” or that it will be paid “as 
may be required by the law of the state in which this 
policy is delivered.” 

The student will find that many differences in company 
practice are determined hy differences in the statutes of 
various states. 

Reduction of Premiums. The most popular method 
of receiving the annual shares of surplus is as a reduc¬ 
tion of the annual premium. For example, in a certain 
company having an ordinary life gross premium of $27, 
age 35, the first-year dividend is now $4.15. Deduction 
of this amount from the gross premium leaves a net 
cost of $22.85 for the first year. (Do not make the mis¬ 
take of speaking of the net cost as the net premium, 
which is, of course, the gross premium less the load¬ 
ing.) The following table of dividends and net cost in 
this company over a period of ten years, on policies 
issued in 1911, is taken from Flitcraft’s Life Insurance 
Manual: 


LIFE INSURANCE FUNDAMENTALS 


m 

m 

V 

bo 

< 


Prem. $58.30 

Net 

Cost 

©lomomooinmo 

t'-©Tf!OOrHlOOqr-(Tt<t> 

C5C5COt-It>©inin'^co 

$467.75 

Average 

Yearly Cost 

for 10 Yrs. 

$46.78 

Divi¬ 

dend 

oininoinoomm© 

s5(NoqinrHoqici-<oq«q 

oocsoiorH'-^C'ieoc'O'^ 

$115.25' 

Age 50 


Prem. $46.60 

Net 

Cost 

moominoiioino 

oiiooinoino'^oocn 

oio5oio6o6t^t>«oinin 

rocoeococsooeoeoccec 

$377.15 

Average 

Yearly Cost 

for 10 Yrs. 

$37.72 

Divi¬ 

dend 

mooinmoomioo 

cdt^t^ooodoioioorH 

1 “H r— 1 r— ( 

lO 

00 

00 

CO 

V* 

Age 45 


Prem. $38.00 

Net 

Cost 

©looinioinioinom 

cDNo»iOi-*t>coc5io© 

cocnfccne*3eoco(N<M(M 

$309.05 

Average 

Yearly Cost 

for 10 Yrs. 

$30.91 

Divi¬ 

dend 

omoininmininoin 

■^t^rHTiKQqnqttsoinoj 

inincdcd©t^i>GOo6o6 

ift 

$70.95 

Age 40 


Prem. $31.70 

Net 

Cost 

moininoooom© 

OoqiONON^rtN^ 

t^ocococoinininTjHTf 

$258.00 

Average 
Yearly Cost 
for 10 Yrs. 

$25.80 

Divi¬ 

dend 

lOOOiOOOOQiOO 

r^T^iOiOiOcOcdcdcOt^ 

09- 

$59.00 

Age 35 


Prem. $27.00 

Net 

Cost 

moinminooinom 

oot>’<jHc<jooqcoeorHoo 

(Nci<N<Nci^4r-<-3rHc5 

$219.00 

Average 
Yearly Cost 
for 10 Yrs. 

$21.90 

Divi¬ 

dend 

10010^1000100*0 

rHcopt>pc^Tjjpo;»-H 

TfHTt^TjJ'^lOlOiOlOCD 

09- 

$51.00 

Age 30 


Prem. $23.50 

Net 

Cost 

inominoooioino 

t>tq^(NT-^c5r^iqeO'-i 

cicioioioooooQooooo 

HilHHHHHHHH 

VS- 

$189.75 

Average 
Yearly Cost 
for 10 Yrs. 

$18.98 

Divi¬ 

dend 

*noiomooom>o© 

t^©O(NTj<t000©r-(Ttl 
• ••••••••» 

COCOxt^T^T^r^T^^iOxO 

09- 

$45.25 

Age 25 


Prem. $20.70 

Net 

Cost 

moomoioomo© 

(NrH©O0l>inrJ;C<l^HCn 

t^t>i^<Dcocdco«ocoin 

4-H r-H i"*4 1—4 i-W t™ 4 f— < r—4 *-* r—4 

«5- 

$166.10 

Average 
Yearly Cost 
for 10 Yrs. 

$16.61 

Divi¬ 

dend 

inoomomom©© 

■^cqt^ooo-Hcc^cDOT 

cococ > oirO'rj333-^'^'!|i 

$40.90 





*-tCOWTt<lO<Ot-~COC6© 

£ 




u J? 



© 




S3 



"rH 



a 



aJ 




H 


(Nfo^mcot>.ooai©4-< 







o 













HHHHHHHHHH 





































































DIVIDENDS 


3ii 

Paid-up Additions. Under the dividend addition 
plan, each dividend, as it becomes due, is used to buy 
paid-up insurance, thereby increasing each year, the 
amount of insurance payable at death. Following is a 
table illustrating the paid-up additions to a $1,000 ordi¬ 
nary life policy in another company over a period of 
thirty years, assuming a continuance of the company’s 
present dividend scale; of course, these additions are 
not guaranteed or estimated for the future, since it is 
impossible to forecast the dividends. This table is for 
rate age 35. 


Years 

Additions 

Total 

in 

Pur¬ 

Amount 

Force 

chased 

Pavable 

m/ 

at Death 

1 

$11.10 

$1,011.10 

2 

11.50 

1,022.60 

3 

11.90 

1,034.50 

4 

12.20 

1,046.70 

5 

12.60 

1,059.30 

6 

13.00 

1,072.30 

7 

13.40 

1,085.70 

8 

13.80 

1,099.50 

9 

14.20 

1,113.70 

10 

14.60 

1,128.30 

11 

15.00 

1,143.30 

12 

15-50 

1,158.80 

13 

16.00 

1,174.80 

14 

16.70 

1,191.50 

15 

17.30 

1,208.80 

16 

18.00 

1,226.80 


LIFE 

INSURANCE 

FUNDAMENTALS 

17 

$18.60 

$1,245.40 

18 

19.30 

1,264.70 

19 

20.10 

1,284.80 

20 

20.80 

1,305.60 

21 

21.50 

1,327.10 

22 

. 22.30 

1 > 349 - 4 ° 

23 

23.10 

1,372.50 

24 

24.00 

1,396.50 

25 

24.70 

1,421.20 

26 

25.40 

1,446.60 

27 

26.30 

1,472.90 

28 

27.30 

1,500.20 

29 

28.00 

1,528.20 

30 

28.80 

!, 557.00 


The purchase of additional insurance with annual sur¬ 
plus is accomplished in exactly the same way as paid- 
up insurance is purchased with the cash value. The 
dividend is used as a net single premium at the attained 
age of the insured to buy paid-up insurance of the same 
kind as the original policy. The ordinary life policy 
being whole-life insurance, the paid-up additional in¬ 
surance, called paid-up additions, is paid-up whole-life 
insurance. 

Conversion of the first dividend of #4.15, mentioned 
above, into a paid-up addition is effected as follows: 
The age of the insured was 35 when the policy was 
issued and is 36 at the end of the year, when the divi¬ 
dend of $4.15 is payable. On page 173 we find that 
the net single premium for $1,000 of whole-life insur¬ 
ance at age 36 is $427.36. Therefore, the addition for 
$4.15 will be T^T/br of $1,000, or $9.71 (or $427.36 : 


DIVIDENDS 313 

$4.15 :: $1,000 : $9.71). But since this company quotes 
the nearest dollar, as a matter of convenience in deal¬ 
ing with such small insurances, the paid-up addition 
actually allowed is $10. This is paid up for the full 
term of the insurance, which is whole life, so that the 
$10 will be paid with the original $1,000 of insurance 
whenever the insured dies (assuming that he keeps the 
$1,000 in force), and, if the policy is in force to age 
96 the $10 paid-up addition will be worth $10 in cash. 

This additional insurance has, of course, the regular 
single-premium reserve (proportionate to the size of the 
addition). The cash value of the addition will be either 
the reserve or the original dividend, and increases the 
cash and loan values of the policy. Therefore, in event 
of lapse, the larger cash value will apply to increase the 
amount of paid-up insurance under the policy, as well 
as both the amount and the term of the extended insur¬ 
ance. In some companies the paid-up additions are 
participating. Such surplus, though quite small in the 
early years of the insurance, grows from year to year, 
and increases the total of paid-up additions, as well 
as their cash values. 

Only the current annual dividend can be converted 
into paid-up additions; dividends that have been left 
at interest cannot be so used. 

Dividend Accumulations. If the policyholder elects 
to have his surplus remain with the company on deposit 
at interest , the company agrees to pay a minimum rate 
of compound interest, 3 per cent or 3^ per cent, 
according to the company. It further agrees to add 
such excess interest as may be determined by the com¬ 
pany; companies are generally paying a total interest 


3 i4 LIFE INSURANCE FUNDAMENTALS 

on dividend deposits, varying from 4 per cent to 4^ 
per cent. This dividend plan offers the policyholder a 
means of accumulating his annual dividends at a satis¬ 
factory rate of compound interest, which otherwise he 
would probably spend. The growing fund will serve in 
emergencies and will amount to a considerable sum in 
old age. With the cash value of the policy at, say, age 
65, it may be of inestimable benefit to the insured him¬ 
self. If, however, he dies before he needs to withdraw 
such accumulations, they will be paid to his beneficiary, 
together with the insurance. The insured may with¬ 
draw his deposits at any time, or, in some companies, 
at the end of any policy year. 

As a rule, the policyholder may change the method 
of receiving his dividends, from time to time, as he 
chooses. 

Acceleration. There is another result accomplished 
by the use of dividends, viz., to make the policy fully 
paid up and to shorten the period in which the policy 
will mature as an endowment. This plan is usually 
called “acceleration,” since the purpose is to “acceler¬ 
ate,” or hasten, the payment of premiums in full or the 
maturity of the policy as an endowment. The method 
of acceleration generally used is as follows: (1) If the 
policyholder leaves his surplus with the company on 
the addition plan and continues to pay the full ordinary 
life gross premium every year, the time will come when 
the cash value, or reserve, on the paid-up additions 
plus the reserve on the original insurance is equal to 
or greater than the whole life net single-premium for 
the original amount of insurance at the attained age 
of the insured. At such time the ordinary life policy 


DIVIDENDS 3 i S 

may be changed to a paid-up whole life policy by pay¬ 
ing to the company out of the cash value of additions 
the difference between the single-premium reserve and 
the ordinary life reserve. The policy will then be the 
same as a new single-premium whole-life policy pur¬ 
chased at the same attained age. Some companies ex¬ 
change a single-premium, or paid-up, policy for the 
ordinary life. Others simply indorse the ordinary life 
as fully paid up. (ia) The same result may be accom¬ 
plished whenever the sum of any accumulated divi¬ 
dends and the reserve on the original policy is equal to, 
or greater than, the net single-premium of a whole-life 
insurance at the attained age. Or, the insured may 
have taken his surplus on the addition plan for a num¬ 
ber of years and changed to the accumulation plan, or 
vice versa; in such case, the policy can be made fully 
paid up whenever the cash value, or reserve, on the 
paid-up additions, plus the accumulated dividends, 
plus the reserve on the original insurance, is at least 
equal to the whole-life net single premium at the at¬ 
tained age. Any excess of cash above the net single 
premium will be paid to the insured or held on deposit 
to his credit and subject to withdrawal by him. 

(2) If the insured uses dividends to reduce the annual 
net cost of his insurance, the policy will not mature 
for its face amount until age 96. But if surplus is 
applied on the addition or interest accumulation plan, 
it can be made to mature “as an endowment” at an 
earlier date, whenever the reserve on the original policy, 
plus the cash value, or reserve, on any additions, plus 
the sum of any surplus accumulated at interest, is at 
least equal to the face of the policy. 


3 i6 LIFE INSURANCE FUNDAMENTALS 

Various Results of Acceleration. Acceleration may 
accomplish any one of the following changes in various 
policies: 

1. Change an ordinary life policy to a limited pay¬ 
ment life policy. 

2. Change an ordinary life policy to an “ endowment ” 
policy. 

3. Shorten the premium-paying period of a limited- 
payment life policy. 

4. Change a limited-payment life policy to an 
“endowment” policy. 

5. Change a continuous-premium endowment policy 
to a limited-payment endowment. 

6. Hasten the maturity date of an endowment policy. 

ANOTHER PLAN OF USING DIVIDENDS TO ACCELERATE 

Under numbers 2 and 4 the word endowment is 
written in quotations—“endowment.” The life poli¬ 
cies are matured for their face in cash, as is a true 
endowment policy; but, under the form of acceleration 
described above, the policy is never really changed from 
life to endowment. The life policy remains a life policy 
to the very time when the total funds on hand, from 
the various sources, are at least equal to the face of the 
policy. The life policy is then cashed in and the total 
fund is paid “as a matured endowment.” 

Of course, no certain prediction, or promise, can be 
made as to when the policy will become fully paid up 
or matured “as an endowment,” because no promise 
can be made as to future dividends. 

The student should understand the difference be- 


DIVIDENDS 317 

tween the accelerative method outlined above and an¬ 
other accelerative 'plan to which the name was first 
applied. An essential difference between the two 
methods is that, while, under the plan already de¬ 
scribed, the original policy is not modified in any way 
until it is actually paid up in one transaction, or is 
cashed in, together with the value of additions and any 
accumulated dividends, on the other hand, under the 
second plan, now to be explained, the original life policy 
is changed immediately upon the payment of the first 
dividend, the dividend being used for the purpose of 
making the change. 

If the ordinary life policy is actually to be converted 
into an endowment policy, it is obviously necessary to 
effect such a change in the reserve of the policy, that 
the payment of future ordinary life premiums will 
mature the policy at an earlier date than age 96; for 
if the reserve remains unchanged and the ordinary life 
rate is continued, the policy will have a cash value of 
$1,000 only at age 96. Let us suppose, for instance, 
that an ordinary life policy issued at age 35 is just one 
year old, and that on the first anniversary date it is 
desired to change it into an endowment that will 
mature at age 84, provided the insured continues to 
pay the regular ordinary life premium. The ordinary 
life reserve at age 84 will be $830.35. If the policy is 
to be matured at that time as an endowment, there 
will then be needed an additional amount equal to the 
difference between $1,000 and $830.35, or $169.65. 
If each policyholder of the group desiring this result 
will pay at attained age 36, the net single premium for 
a pure endowment of $169.65 to mature at age 84, he 


318 LIFE INSURANCE FUNDAMENTALS 

will receive, at age 84, #830.35 -{-$169.65, or #1,000 in 
cash, as a matured endowment. Moreover, he will 
know at age 36 , when he pays the small single premium 
to procure the pure endowment of $169.65 that, if he 
continues to pay his ordinary life premium, his policy 
will be worth #1,000 in cash at age 84. 

Suppose the first dividend on his $1,000 ordinary life 
policy were at least equal to the net single premium 
for the pure endowment of $169.65 at age 84, the in¬ 
sured could, by leaving his dividend with the com¬ 
pany for this purpose, have his policy changed immedi¬ 
ately to an endowment, guaranteed to mature at age 
84. If the next year’s dividend were used in a similar 
way, the maturity date could be guaranteed for an 
earlier date, the endowment being changed accordingly; 
and so from year to year the maturity of the policy as 
an endowment would be changed, or accelerated, to an 
earlier fixed date of maturity. 

The policy would no longer be an ordinary life, once 
it was so changed that the maturity date was advanced 
from age 96 to an earlier year. It would be an endow¬ 
ment insurance policy— e.g., an endowment at 84. 

If the insured died in the meantime , would the divi¬ 
dends which had been used to buy the pure endowment be 
paid to his beneficiary? No, he cannot eat his cake and 
have it, too. If he wishes the policy to be changed to 
an endowment maturing at an annually diminishing 
age, he must pay (not deposit, but pay) the dividends 
as extra premiums for this purpose, exactly as he pays 
an extra premium for a twenty-year endowment as 
compared with the ordinary life, or as he pays more 
money for a twenty-payment life than he pays for the 


DIVIDENDS 319 

ordinary life; though he knows that the higher premium 
policies provide no more at death than the ordinary 
life policy. Of course, under the addition, or the divi¬ 
dend accumulation plan, in case of death before the 
policy is “matured as an endowment,” the additions 
or the accumulations are paid in addition to the original 
insurance; for the dividends have been used to buy 
more insurance or to start a savings fund and not to 
change the life policy into an endowment guaranteed 
to mature at a definite date. It must not be expected 
that the dividends spent as extra endowment premiums 
will be returned at death, any more than it would be 
expected that the difference (at age 35) of about $23 
a year between a twenty-year endowment premium and 
an ordinary life premium would be returned if the holder 
of the endowment policy died. 

Which of the three accelerative plans is best for the 
policyholder? In order to consider the question with¬ 
out having in mind any idea of competition between 
companies, let us assume that one company uses all 
three plans; which, then, will be best for the policy¬ 
holder of that company? Here again is a case in which 
we can’t eat our cake and have it, too. Each plan has 
its advantage. On each plan the dividends are used for 
one purpose and, of course, we can’t spend the same 
amount of money for more than one thing. 

The first point to bear in mind is that, if we assume 
one company using all three plans, the dividends and 
rate of interest will be the same for each plan. (1) 
Under the dividend accumulation plan a fund will be 
built up consisting of the dividends and compound 
interest. (2) Under the addition plan the same divi- 


320 LIFE INSURANCE FUNDAMENTALS 

dends and rate of interest will be used, but, since the 
additions are insurance, they must bear their share of 
the cost of insurance, so that their cash value will be 
less than the amount under the dividend accumulation 
plan. (3) Under the endowment plan, there will be 
added to the policyholder’s dividend accumulations his 
share in the benefits of the endowment survivors, as is 
the case under all endowment policies. 

Therefore, dividends and interest being the same, the 
endowment plan will mature a policy slightly earlier 
than the dividend accumulation plan; and the latter, 
a little sooner than the addition plan. 

On the other hand, if the policyholder dies before his 
policy matures, he leaves only the face of the policy 
under the endowment plan; he would leave the divi¬ 
dends accumulated at interest in addition to the face 
of the policy under the dividend accumulation plan; he 
would leave most for the beneficiary under the addition 
plan, for in that case the dividends have been used to 
purchase additional insurance. 1 

The question of what is best for the policyholder 
depends, for its answer, as usual, on what he needs 
most. 

Automatic Payment of Overdue Premiums. Some poli¬ 
cies provide for automatic payment of overdue pre¬ 
miums out of the dividend accumulation, or deposit, 
fund. If the insured is leaving his dividends to accumu¬ 
late at interest and the days of grace for the payment 
of an overdue premium expire, the company will pay 

1 There are some instances in which dividends accumulated for long 
periods will surpass the amount of paid-up additions. This is particularly 
true of nonparticipating additions. 


DIVIDENDS 321 

the premium out of the dividend accumulations if they 
are sufficient, provided the insured has previously re¬ 
quested this service in writing. If the surplus deposits 
are insufficient to pay the premium, but are enough to 
pay a semiannual installment instead of an annual 
premium, or a quarterly, instead of a semiannual, in¬ 
stallment, the company will pay the smaller amount; 
but the company will not apply the dividend deposits 
in this way if they are insufficient to pay at least a 
quarterly installment of the annual premium. 

Post-mortem Dividend. A post-mortem dividend is 
usually paid— i.e. y a dividend is paid after the insured’s 
death with the settlement of the insurance. Ordinarily, 
this dividend is the pro rata of the current year’s divi¬ 
dend from the beginning of the policy year to the time 
of the insured’s death; some policies, however, provide 
for payment of a full year’s surplus as a post-mortem 
dividend. 




CHAPTER XXIII 


LIMITED-PAYMENT LIFE, ENDOWMENT, AND TERM 


POLICIES 


MITED-PAYMENT Life Policies. There are very 



few differences between the ordinary life and 


the limited-payment life policies, for they are all 
whole-life policies. The amount of premium differs 


at the same age. As its name implies, the premiums on 


the limited-payment policy are payable for a limited 


number of years only, such as five, ten, fifteen, nine¬ 
teen, twenty, twenty-five, or thirty years. The 
twenty-payment life is probably the most popular of 


these policies, though the twenty-five and thirty-pay 


ment policies are probably better for the average man, 


since they will pay up his policies while he is still earn 


ing satisfactorily, and, as the premiums are smaller, 
will permit him to carry a larger amount of insurance. 

The limited-payment net premiums being larger, the 
reserves are larger on limited-payment policies; so, 
too, are the cash values and the paid-up and extended 
insurance values. 

Limited-payment Policy Becomes Single-premium 
Policy. When the last of the premium-payments on a 
limited-premium policy has been paid, the policy is 
from that time always on a single-premium basis. To 
illustrate: The 3 per cent net single premium of a 
whole-life policy at age 55 is $609.92. This amount 


322 



ENDOWMENT POLICIES 323 

is also the 3 per cent terminal reserve (and, usually, 
the cash value) at the end of the twentieth year for a 
twenty-payment life policy issued at age 35; also, at 
the end of the fifteenth year for a fifteen-payment life 
policy issued at age 40; also at the end of the tenth 
year for a ten-payment life policy issued at age 45, etc. 
The terminal reserve in the last year of the premium¬ 
paying period for all limited-payment life policies on 
the same interest and mortality basis, which become 
paid up at the same age, is the same as the net single 
premium for the same attained age. 

Endowment Policies. There are not nearly so many 
differences between the details of endowment and life 
policies as one might think. Of course, the insurance, 
under the endowment policy, is for a limited term 
and not for life. The face amount matures at an earlier 
age than 96. 

The paid-up insurance is not paid up for life, as is the 
case in life policies; on the contrary, it is paid up only 
for the remaining years of the endowment term, but it 
is paid-up endowment insurance, and is payable not 
only if the insured dies during the remainder of the 
period, but also if he survives to the end of the endow¬ 
ment period. 1 

Pure Endowment with Extended Insurance. There 
is an additional feature in the extended insurance under 
endowment policies. Of course, the extended insurance 
should not extend beyond the endowment period. Yet, 
after payment of a few annual premiums, the cash 

1 In a few instances, endowment policies provide that at the end of the 
endowment period or in case of prior lapse paid-up insurance for life may 
be selected as an option. 


3 2 4 LIFE INSURANCE FUNDAMENTALS 

value of the endowment policy may be more than 
enough to buy extended insurance for the face amount 
to the end of the period. We know we should not be 
permitted to use the extra money to buy either a larger 
amount of extended insurance or to extend the in¬ 
surance beyond the original term. What shall we do 
with this surplus cash? It seems to be quite logical, 
especially since the purchaser of the endowment is 
anxious to have something for himself if he lives to the 
end of the period, to use the excess of the cash value 
over the single premium of the extended insurance, as a 
— net single premium for a pure endowment payable to 
the survivor at the end of the period. 

Therefore, in the rate book and policy, the ex¬ 
tended insurance figures show, after certain years 
(under various headings, such as “pure endowment/’ 
“cash,” etc.), the amount of pure endowment payable 
in cash, if the insured survives to the end of the term. 

Paid-up Additions. Paid-up additions under en¬ 
dowment policies are paid-up endowment insurance, 
payable if the insured dies before the end of the term, 
and payable to him in cash if he lives to the end of the 
term. 

Duration of Disability Income . In some companies 
the disability income under endowment policies is 
payable for life; in other companies it is payable only 
to the end of the endowment period, when the insured 
will receive the face of the policy in cash, or may receive 
an income in lieu of the lump sum. 

Endowment Names. Endowments are known by the 
following names: Continuous-premium endowment, 
such as a twenty-year endowment, whose premiums are 


ENDOWMENT POLICIES 325 

payable continuously to the end of the endowment 
period; limited-payment endowments, such as a ten- 
payment twenty-year endowment, with premiums 
payable for ten years only, yet maturing at the end of 
twenty years; short, or short-term, endowments, a 
name applied commonly to endowments with twenty 
years to run or less, long, or long-term, endowments, 
those, in general, which run for more than twenty 
years. 

Optional Settlements to Insured. At maturity an 
endowment policy may be paid to the insured himself 
under one of the optional settlement plans, just as it 
may be so paid to the beneficiary, in case of the in¬ 
sured's death. Thus, the policyholder may use an 
endowment policy to provide an income to the bene¬ 
ficiary if he dies first, or to himself in his old age. 
From this point of view, the endowment policy be¬ 
comes a particularly serviceable contract, especially 
the long endowments maturing at 55, 60, 65, or 70. 

The insured may designate some one other than him¬ 
self to receive the proceeds of the endowment at 
maturity during his lifetime. 

The Term Policy. The simplest form of insurance is 
that for one year—one-year term insurance. You pay 
a rate for one year for the age at which you insure; one 
year later you pay the rate for one year older, etc., 
the premium increasing constantly until at older ages 
it is prohibitive. If you die your beneficiary gets the 
proceeds of the policy. There are no cash values, 
paid-up insurance, or extended insurance; no loan 
values. There are no reserves. Indeed, in actual 
practice very few companies make use of this plan 


326 LIFE INSURANCE FUNDAMENTALS 

except in group insurance, where the one-year-term 
policy is regularly employed. 

Five-year and Ten-year Term Policies . The five- 
and ten-year term policies are the most popular of the 
term-policy family. Fifteen- and twenty-year term 
policies are sometimes written. These policies, in¬ 
suring for a period of five or ten years, etc., differ from 
the one-year term policy principally in that they have 
level premiums. Whereas, under the one-year term 
plan, insuring for five or ten years, etc., you would pay 
a constantly increasing rate, the premium would be the 
same every year under the five- or ten-year term policy. 

If you die during the five years, or the ten years, the 
insurance, say, $10,000, is paid to your beneficiary; 
but if you are living at the end of the five or ten years 
the insurance expires. Once the insurance has expired, 
protection can be continued only by applying for a new 
policy, passing a new medical examination, and paying 
the rate based on your new rated age. 

Convertible Term and Renewable Term. Expiration 
of the insurance can be avoided and a continuance of 
protection can be secured by one of two methods: 
(1) by buying the convertible term policy, which gives 
the right to change from the term plan to a more du¬ 
rable and substantial plan—life or endowment. In 
some companies, the conversion must be made not 
later than the end of the third or fourth year for five- 
year term policies, and the seventh year for ten-year 
term policies; yet there are some companies that 
grant the privilege of exchanging at the end of the 
five- or ten-year periods. The reason why conversion 
is so often required by the end of the third, fourth, or 


CONVERTIBLE TERM 327 

seventh year is that the companies making these re¬ 
quirements fear “adverse selection” (or “selection 
against the company”) i.e. y that the tendency to con¬ 
vert will be greater among those whose health has be¬ 
come impaired than it will be among these who are 
robust and believe they can, with safety, allow their 
policies to expire and take a chance on being able to 
secure a new policy at any time. 

(2) The second way of continuing the protection 
under a five- or ten-year term policy is by securing a 
renewable term policy, which is not used so extensively 
as it was in the past. This policy gives the policy¬ 
holder the privilege of renewing the term insurance, at 
the expiration of the term, for a similar period of years; 
and this renewal may be repeated up to a certain limit, 
when the insurance ceases altogether. At each renewal 
of the insurance, say at the end of each ten years, the 
rate is increased. No medical examination is required 
for renewing the insurance from term to term. 

The Convertible Term Policy. The most popular 
form of term insurance is the convertible term policy. 
Without the conversion privilege term insurance is 
merely temporary protection. There are certain cases 
in which temporary insurance is needed, as when a 
borrower must repay a loan in five years. Assuming 
that he has ample insurance for his other needs, a five- 
year term insurance might be exactly what he should 
have for protecting his estate against the mortgage in 
event of his death. However, term insurance is inade¬ 
quate in most cases. Yet the convertible term policy 
may often be used very satisfactorily for the purpose 
of initiating a permanent form of insurance. 



328 LIFE INSURANCE FUNDAMENTALS 

Converting at Attained Age. For example, a man 35 
years old, whose resources for insurance are at present 
quite limited, but who has reason to believe he will be 
able in a few years to carry a life policy or an endow¬ 
ment insurance, may at once secure say, $10,000 of 
insurance on the five-year term plan by paying the 
moderate annual term rate of $131.90 (in a certain 
participating 3 per cent company), continue it for three, 
four, or five years (varying with different companies), 
and then, without medical examination, have the 
term policy exchanged for a life or endowment policy. 
Or, the exchange may be made at any time within the 
three-, four-, or five-year period. 

At the end of, say, four years the policyholder is 39 
years old and his life policy, or endowment policy, 
would be issued as of his attained age, 39, and he would 
pay the premium for the attained age. At age 39 the 
ordinary life rate in the same company would be 
$299.20 for a $10,000 policy. 

The method of converting term insurance described 
above is that known as “conversion at the attained 
age” or “current” conversion. The new policy which 
is issued in exchange for the term policy is treated in 
every way as new insurance. It bears a new policy 
number, is based on the attained age of the insured, 
cash values date from the date of conversion, a limited- 
payment policy, say twenty-payment, would be paid 
up twenty years from the date of conversion, a twenty- 
year endowment would mature twenty years from the 
conversion date—in every respect the life or endow¬ 
ment policy would be like one which had just been 
issued on a new application and medical examination. 



CONVERTIBLE TERM 329 

The term policy reserve will be allowed in whole or 
partially, as a credit toward the payments to be made 
at the time of conversion. 

Converting at the Rated Age. There is a second method 
of converting term insurance , known as “ conversion at the 
rated age,” or “retroactive conversion/’ To illustrate, 
if the policyholder whose policy was issued at age 35 
desired four years later to exchange it for an ordinary 
life policy, under this plan the new policy would be 
treated very differently from the one exchanged at the 
attained age. Indeed, instead of being treated as a 
new policy it would be treated as an old one, just as if 
it had been issued four years before at the original, or 
rated, age, 35. The premium in the same company 
would be $263.50, exactly what he would have paid if 
he had taken out an ordinary life policy at the time 
he applied for the term insurance. But four years have 
elasped; so he would have to pay immediately not 
only the premium of $263.50 for the fifth year, just 
starting, but also difference in back premiums, with 
compound interest at the stipulated rate, and, in 
participating policies, less the difference in back divi¬ 
dends for the first four years. 

The new policy bears the old number of the term 
policy. It has the same values it would have had if it 
had been issued at age 35. If it is a twenty-payment 
life policy, only sixteen more premiums are to be paid; if 
a twenty-year endowment,it will mature in sixteen years. 

Most conversions are made at the attained age, for 
the reason that the average policyholder finds it in¬ 
convenient to pay the arrears necessary to convert at 
the rated age. 




330 LIFE INSURANCE FUNDAMENTALS 

Some companies now issue only the five-year form of 
term insurance, with the convertible privilege—that is, 
such companies really want to have term insurance 
used, as far as possible, only for the purpose of initiating 
the more substantial form of insurance. 

Cash Values. Term policies, in most companies, 
have no cash values at any time. A few companies 
grant cash values and extended insurance under term 
policies, but there are never any values at the end of 
the term. Such values as are allowed are necessarily 
very small, since the terminal reserves are small (see 
under term insurance in the section of this book on 
“ Principles ”). 



V 


CHAPTER XXIV 

THE LIFE-INCOME POLICY 

NE of the most interesting, as well as most bene¬ 
ficial, of all life-insurance policies is the “ life- 
income policy ”—sometimes called the “ monthly- 
income policy” or the “continuous installment policy.” 
The purpose of this policy is to provide a fixed income , 
such as $100 a month, for at least twenty years certain 
and thereafter for life. It resembles the continuous- 
installment settlement of the regular life, endowment, 
and term policies; yet there are important differences 
which make it advisable to analyze the “life-income 
policy” carefully. 

In the continuous-installment settlement of regular 
policies, which has been fully described, we saw that, 
instead of paying $1,000 in a lump sum, the bene¬ 
ficiary could receive a life income with twenty install¬ 
ments certain, and that the amount of the installments 
varied according to the age of the beneficiary at the 
insured’s death. This is because the income payable 
after the expiration of the twenty years is a deferred 
life annuity to the beneficiary, purchased with the 
insurance money at the insured’s death. 

Under the “life-income policy,” the amount of the 
income does not vary according to the age of the benefi¬ 
ciary at the insured’s death. No matter when he dies, she 
will get $10 a month, $100 a month, $500 a month, etc., 
for at least twenty years certain and thereafter for life. 

331 




332 LIFE INSURANCE FUNDAMENTALS 

Basis of Premium Rates. The rates are usually 
quoted per unit of $10 a month, though sometimes 
other units are used. When the insurance is taken, the 
amount of the premium is determined by the combina¬ 
tion of the ages of both the insured and the beneficiary. 
The combination of ages producing the highest rates 
is for an insured person who is advanced in years and 
a beneficiary who is quite young. For example, men 
60 to 65 years old who buy the “life-income policy” 
for granddaughters who are still very young, will pay 
the highest rates, because, on the average, the grand¬ 
fathers will not only die before their granddaughters, 
but will die relatively soon, and the granddaughters will 
live to receive a large number of annuity payments. 
Young men 18 to 20 years old insuring on this plan 
in favor of their grandmothers, from 60 to 80 years old, 
would pay very low rates, because, on the average, the 
very young men will outlive their grandmothers, and, 
in any event, the grandmothers will not live to receive 
a very large number of annual payments. 

The following 3 per cent participating rates per $10 
a month, ordinary life basis, illustrate the comparison 
just made: 


MONTHLY LIFE INCOME, OR CONTINUOUS INSTALLMENT, 

POLICY 


Age of 
Insured 

Age of 
Beneficiary 

Annual Premium for $10 
a Month Twenty Years 
Certain and for Life 

60 

2 

$201.87 

20 

60 

32.81 









THE LIFE-INCOME POLICY 333 

In between these extremes are many different com¬ 
binations of ages, with a tendency toward the higher 
costs as the age of the insured increases or as the age 
of the beneficiary is decreased, and with a tendency 
toward lower cost as the age of the insured is decreased 
or the age of the beneficiary is increased. 

Deferred Survivorship Annuity. In both the con¬ 
tinuous-installment settlement and the continuous- 
installment policy, the twenty-year-certain income is 
calculated in the same way, but the annuity income 
for the two plans is not the same. In the installment 
settlement it is a deferred life annuity based on the bene¬ 
ficiary’s age at the insured’s death; in the life-income 
policy it is a deferred survivorship life annuity , based on 
the ages of both the insured and the beneficiary at the 
time the policy is issued— i.e., it is based on the prob¬ 
ability of the beneficiary’s surviving the insured. This 
probability of survival of the beneficiary, as has already 
been explained, will be increased, the older the age of 
the insured or the younger the age of the beneficiary, 
and decreased the younger the insured or the older the 
beneficiary. 

Composition of the Life-income Policy . The “ life- 
income policy” is a combination of an insurance on a 
life or endowment plan with a deferred survivorship 
annuity. The simplest way to show the composition 
of this policy is to begin with a regular life, or endow¬ 
ment, insurance which will pay annual limited install¬ 
ments of $65.26 per $1,000 (3 per cent) a year for 
twenty years certain. Suppose the insured, 35 years 
old, who is buying a $10,000 ordinary life policy, wants 
it paid in twenty limited annual installments of $652.60 


334 LIFE INSURANCE FUNDAMENTALS 

each, but requests also that he be permitted to pay an 
extra premium and have the payment of $652.60 a year 
continued to his wife, who is now 30 years old, beyond 
the end of the twenty years, as long as she may live. 

We might suggest that he secure a life income by 
selecting the continuous-installment option in the policy 
instead of the limited installments; but he objects that, 
since he can’t tell when he will die and since the amount 
of the continuous installments will depend on the age 
of his beneficiary at his death, he has no way of provid¬ 
ing in advance a fixed amount of income. He knows 
$10,000 will provide a fixed income of $652.60 a year 
for twenty years, and, if it can be arranged, would like 
to pay an extra premium and guarantee the continu¬ 
ance of $652.60 a year beyond the twenty years, as long 
as his wife lives. In other words, he wants us to add 
to his insurance contract a deferred survivorship annuity 
contract for an income of $652.60 a year. 

Finding the Rate. The insurance companies have 
computed rates for such a supplementary contract based 
on the ages of both the insured and the beneficiary, 
which, in this case, are 35 and 30 years, respectively. 
Turning to the rates of a certain 3 per cent company, 
we find that for ages 35-30 the extra premium neces¬ 
sary to provide a survivorship annuity of $65.26, de¬ 
ferred twenty years after the insured’s death, is $3.22, 
or $32.20 for an annuity of $652.60. The ordinary life 
rate for $10,000 of insurance which will provide $652.60 
a year for the twenty years certain in the same 
company is $268.80 (participating, 3 per cent). There¬ 
fore, an annual premium of $268.80 -f- $32.20, or 
$301.00, will provide a fixed income of $652.60 for 


THE LIFE-INCOME POLICY 335 

twenty years certain and for life. No matter when 
the insured dies, the income will be the same—$652.60 
a year. The first annual payment will be made at the 
insured’s death. 

Rates for $10 a Month. Suppose that, after we had 
submitted these figures to our client, he should say: 
"That is fine. But the amount is a queer one, viz., 
$652.60 a year, and, after all, Td like for my wife to 
have a monthly income of, say, $100 a month for at 
least twenty years certain and thereafter for life. How 
much would that cost me?” Let us work out our 
premium on a basis of $10 a month, so as to have a 
unit rate. Ten dollars a month is equivalent to an 
annual payment of $120 (we assume that no allowance 
will be made for monthly interest on the deferred 
monthly payments). Therefore, the rate for $120 a 
year will be as many times the rate for $65.26 a year 
as $65.26 (i.e., $65.2571) is contained in 120 (i20-r- 
65.2571), or 1.83888. It will require 1.83888 times 
$1,000 = $1,838.88, or $1,839 of insurance, at $26.88 per 
$1,000, to provide $120 a year for twenty years certain 
and 1.839 times the deferred survivorship annuity rate 
of $3.22 per $65.26 of annuity to provide payment of 
the life annuity of $120 after the expiration of the 
twenty years. The rate per $120 a year, or $10 a 
month, of income for twenty years certain and for life 
will, therefore, be 1.839 X ($26.88+$3.22), that ls > 
$55.35 (no allowance being made for interest at 3 per 
cent on deferred monthly payments). The annual 
premium for $100 a month will, therefore, be 10 X 

#55*35> or $553.50. 

Allowance for Monthly Interest. The first year's pay - 


336 LIFE INSURANCE FUNDAMENTALS 

ment of $120 will accrue in one sum at the death of the 
insured , no matter whether the beneficiary is to receive 
$120 a year in a single payment or whether she is to 
receive $10 a month; and subsequent annual payments 
will accrue at the beginning of each year thereafter. 
Therefore, if the income is paid monthly, all monthly 
payments except the first one in each year will be 
deferred, or held back, for periods varying from one 
to eleven months; 11 payments for 1 month, 10 pay¬ 
ments for 2 months, 9 payments for 3 months, etc., and, 
finally, 1 payment for 1 month (the eleventh month, 
for in each year the last monthly payment is made at 
the beginning of the twelfth month). 

If we allow monthly interest, at the reserve rate of 
3 per cent on these #10 monthly payments, deferred 
from one to eleven months in each year, the average 
interest rate per month would be the equivalent of 
about 1.375 P er cent a year on the annual payment of 
#120. So, premiums quoted for the $io-a-month in¬ 
come could be decreased accordingly. We shall, there¬ 
fore, reduce the factor of 1.839, discounting it by deduc¬ 
tion of 1.375 P er cent, as follows: 1.838881.01375 = 
1.8139, or 1.814. 

Several 3 per cent companies which allow interest on 
deferred monthly payments use this factor of 1.814. 
If we had used 1.814 instead of 1.839 in figuring the 
premium for a life income of $10 a month, we should 
have multiplied as follows: 1.814X$30.10=-$54.60. 

Most companies do not allow the monthly interest. 
The monthly payments are portions of the annual in¬ 
stallments which were originally provided. If the pay¬ 
ments are to be made monthly instead of annually, it 


THE LIFE-INCOME POLICY 337 

will, of course, cost at least twelve times as much in 
labor, postage, stationery, etc., as to pay annually; and 
many companies hold that this extra service makes it 
inexpedient to allow the monthly interest. 

Various Factors. Companies using the same interest 
basis use various factors, such as 1.83888, 1.839, 1.840, 
1.814. Those using the first three factors do not allow 
interest on deferred monthly payments. The factor 
1.83888 is the most exact of the first three and is used 
by some companies; 1.839 is practically the same, and 
the difference between these and 1.840 is extremely 
small. The latter has the advantage of being a round 
figure, which is very convenient. 

The Insurance Portion of the Plan. Of the total 
premium for the life-income policy of $10 a month, 
viz., #55.35, the portion required for the insurance to 
provide the twenty payments certain, #49.43 (1.839 X 
26.88), is far larger than the portion required for the 
deferred survivorship annuity, viz., #5.92 (1.839X3.22). 
This is because the insurance must be paid whenever 
the insured dies, while nothing will be paid from the 
deferred survivorship annuity unless the beneficiary 
lives twenty years longer than the insured, and the 
annuity will cease whenever the beneficiary dies. 

If the beneficiary dies before the insured, the deferred 
survivorship annuity provision is terminated, for the only 
risk insured by it was that of this particular bene¬ 
ficiary’s surviving the insured. If the beneficiary had 
lived out the twenty years, the company would have 
paid the annuity as long as she lived. But it was 
understood that there would be no benefit whatsoever 
from the annuity unless she did outlive her husband 


338 LIFE INSURANCE FUNDAMENTALS 

by at least twenty years. The annuity privilege will 
not be transferred to another beneficiary. The insur¬ 
ance portion of the contract may, however, be made 
payable to a substitute beneficiary either in cash or in 
installments certain of #10 a month. After the bene¬ 
ficiary’s death the total annual premium will be reduced 
by the amount of the deferred survivorship annuity 
premium. 

The amount of insurance to provide #10 monthly for 
the twenty years certain is #1,000 multiplied by the 
factor, 1.83888, 1.839, 1*840, 1.814, etc -> f° r 3 P er cent 
policies, and 1.73056, 1.731, #1737.20, #1,737, #1,740, 
#1,750, etc., for 3>£ per cent policies. Take, for ex¬ 
ample, a 3 per cent company whose factor is 1.814. 
The amount of insurance for which the company is 
obligated at the insured’s death is #1,814 under a #10- 
a-month policy. Whether the beneficiary survives the 
insured or not, the proceeds of the insurance are #1,814, 
payable #10 a month for twenty years if the bene¬ 
ficiary lives, or payable in cash if she dies before the 
insured. 

Surrender Values. The insurance of #1,814 (#1,839, 
#1,731, etc.) is the basis of the cash and loan values and 
paid-up and extended insurance values of the “ monthly 
life-income policy.” 

The deferred survivorship annuity premium adds 
nothing to the cash values. The cash and loan values 
and the paid-up insurance under a #io-a-month policy, 
on the ordinary life basis, will be the values for #1,000 
of insurance multiplied by the factor (1.814, 1.839, 
1.731, etc.), of course, the term of the extended insur¬ 
ance will be the same as for #1,000. 


THE LIFE-INCOME POLICY 339 

Usually, if the policy is surrendered during the life¬ 
time of the original beneficiary, there is a paid-up 
deferred survivorship annuity value— i.e. y although the 
cash value of the insurance portion of the contract may 
have been taken by the insured, if the beneficiary lives 
twenty years longer than he does, she will at the begin¬ 
ning of the twenty-first year begin to receive a monthly 
life income, depending in amount on the number of 
years the insurance was in force before surrender. 

If the policy is participating, the dividends are 
usually based on the insurance premiums only and not 
on the deferred survivorship annuity premiums. 

The Amount of Insurance. The amount of the insur¬ 
ance under the monthly life-income policy is a common 
subject of misunderstanding, due to the fact that there 
are two methods of stating it. In policies paying #100 
a month for twenty years certain and for life, the insur¬ 
ance is sometimes stated as $24,000, payable in 240 
monthly installments; sometimes as $18,140 (if the 
factor is 1.814), the commuted value. Both state¬ 
ments are true; yet frequently it is not understood 
that the two amounts are really one and the same 
thing. The $24,000 is the $18,140 plus 3 per cent 
interest on the decreasing commuted value from year 
to year for twenty years. Since the actual amount 
of insurance is $18,140 (or $18,388.80, $18,390, 
$17,305.60, $17,310, $17,400, etc.), if the beneficiary 
dies before the insured, the $18,140 (etc.) will be paid 
in a lump sum at his death; otherwise, it will, of 
course, be paid to the beneficiary in 240 monthly 
installments of $100 each. 

Various Monthly Income Policy Forms . The monthly 



340 LIFE INSURANCE FUNDAMENTALS 

life-income, or continuous-installment, policy is written 
in combination with limited-payment life, and endow¬ 
ment, insurance, as well as with the ordinary life. Also, 
it is sometimes written with ten installments certain 
instead of twenty. In this case, the premiums per $10 
a month are less than for twenty years certain; for the 
amount of insurance necessary to provide the install¬ 
ments certain for only io years is greatly reduced, as, 
for example, from $1,814 to $1,040 (3 per cent). There 
is, of course, a slight increase in the premium for the 
deferred survivorship annuity. 

The Endowment Form. Under the endowment form, 
it is sometimes provided that, upon maturity of the 
policy as an endowment, there will be paid an income 
of, say, $100 a month for at least twenty years certain, 
and for as long thereafter as either the insured or the 
beneficiary is alive. The premium is specially calcu¬ 
lated to include this special benefit. If the endowment 
is paid in cash, the amount will be the same as the 
original commuted value , as, for example, $18,140 for a 
$ioo-a-month income. 

Continuous Installment Policy vs. Continuous Install¬ 
ment Settlement. The question is often raised, “ Which 
is the better life-income plan, the continuous-installment 
policy (life-income policy) or the continuous-installment 
optional settlement in the regular policies ?” 

Each has its advantages, and the dilemma presents 
another case of our not being able to eat our cake and 
have it, too. In the following discussion, we assume that 
the same amount of premium is invested on both plans. 

The continuous-installment policy provides the same 
amount of income, no matter what the beneficiary’s 


THE LIFE-INCOME POLICY 341 

age at the time of the insured’s death. The amount 
of the continuous-installment settlement varies ac¬ 
cording to the beneficiary’s age at the insured’s death. 
The first is a level amount for all ages; the second is 
lower than that level during the earlier years of the 
insurance, but finally crosses the level of the continu¬ 
ous-installment policy’s income, and then exceeds it 
by a constantly increasing margin. In the illustrative 
diagram below we assume that the insured, 30, buys 
for his wife, 25, a $ioo-a-month continuous install¬ 
ment policy on the ordinary life basis for a 3 y£ per 
cent nonparticipating premium of $3 52.80, the com¬ 
muted value being $17,305.60. At the same time he 
buys in the same company a regular ordinary life 
policy for as much as the same amount of premium 
will purchase, viz., $20,523.56. Whenever the insured 
dies, the continuous installment policy will pay $100 
a month, represented by the level, or horizontal, 
line in the diagram. On the diagonal line are the 
amounts payable monthly for various ages of the 
beneficiary, at the insured’s death, under the con¬ 
tinuous-installment settlement of the $20,523.56 ordi¬ 
nary life policy. The lines are supposed to cross at 
the attained age at which the incomes under the two 
plans would be approximately the same. 

Both policies are taken when the beneficiary is 25 
years old. No matter when the insured dies, the life- 
income policy will pay $100 a month. If he dies before 
the beneficiary is 47 years old, she will receive less 
than $100 a month under the optional settlement of 
the regular ordinary life policy. If the insured dies 
when she is 47 years old, both plans will pay practically 


342 LIFE INSURANCE FUNDAMENTALS 


Life-Income Policy vs. 
Continuous Installment Option 


Comparison of life income with payments for at least 
twenty years certain, based on a 35 per cent nonpartic¬ 
ipating company’s rates. When insured is 30 and 
beneficiary 25, a life-income policy of $100 a month is 
purchased on the ordinary life basis, and an equal amount 
of premiums is also invested in regular ordinary life insur¬ 
ance. The diagram shows comparative monthly incomes 
for several different ages of beneficiary at time of insured’s 
death. 


Level line represents life-income policy, $100 a month. 



Monthly 

Income 


Life-income policy pays more if insured dies during first 
twenty-two years of insurance. 

Duration of this superiority varies slightly in different 
companies for the same ages, and varies according to ages 
of insured and beneficiary at time of policy issue. 













THE LIFE-INCOME POLICY 343 

the same income, #100 a month. If he dies after she 
passes age 47, the continuous-installment settlement 
will pay more than $100 a month. 

For a man who has little children and whose income 
forces him to a smaller amount of insurance than he 
really needs, the life-income policy is preferable. 

The most critical period for his children is while they 
are young, and the maximum benefit should be guar¬ 
anteed in case their father dies early. If there is great 
doubt as to which of the two plans should be used in a 
given case, a good compromise would be to invest 
one-half of the premiums in one plan and one-half on 
the other. 

Values Compared. On which of the two plans illus¬ 
trated above are the cash values the larger? This 
question is answered when we point out that the in¬ 
surance under the #ioo-a-month life-income policy is 
#17,305.60, while under the regular ordinary life policy 
the insurance purchased with the same amount of 
premium is #20,523.56. The difference in the amount 
of ordinary life insurance is #3,217.96. The cash value 
per #1,000 at the end of twenty years is #258.64; so 
that the total cash value of the #20,523.56 ordinary life 
policy would exceed that of the life-income policy by 

3.21796X#258.64, or #832.29. 

Medical Examination. To secure the life-income 
policy a medical examination is required of the insured, 

but not of the beneficiary. 

Survivorship Annuity. A few companies write a 
policy known as the survivorship annuity. This plan 
of insurance is the parent of the deferred-survivorship 

annuity. 


344 LIFE INSURANCE FUNDAMENTALS 

While the deferred-survivorship annuity provides 
a life annuity to the beneficiary, to begin twenty (or 
ten) years after the insured’s death, the survivorship 
annuity provides a life annuity to begin immediately 
after the insured’s death. The rate is based on the 
ages of both the insured and the beneficiary at the time 
the survivorship annuity is applied for. 

This plan is particularly valuable when there is no 
contingent beneficiary and no probability of there 
being one. The rates are relatively low; but no benefit 
can be paid to anyone except the original beneficiary 
and she will receive an income only so long as she lives 
(after the insured’s death). There is no cash value, 
no commuted value, etc. 

There are, however, comparatively few instances in 
which there is no probability of there being a con¬ 
tingent beneficiary, and for this reason, especially, the 
survivorship annuity is not advisable in most cases. 

In one particular instance, however, it is often to be 
recommended. If a young man wishes to insure in 
favor of a person advanced in age, say, his mother, but 
has already assumed relatively heavy premiums for 
the protection of his wife and children, he can secure 
unusually favorable rates under the survivorship 
annuity. If he is 30 and his mother 60, an annual 
premium of $148 (3 per cent participating) will guar¬ 
antee his mother a survivorship life annuity of #i,oqo, 
payable annually, beginning at his death. 

However, if a father 60 years old were to purchase a 
survivorship annuity of $1,000 for his daughter, 30, 
his annual premium would be about $1,250 (3 per cent 
participating). 


THE LIFE-INCOME POLICY 345 

The survivorship-annuity contract is automatically 
terminated if the beneficiary dies before the insured, 
and, as stated above, will have no cash value for the 
insured and no insurance value for any other beneficiary. 

A medical examination is required of the insured, 
but not of the beneficiary. 

Avoid Technical Discussions . The life-insurance 
salesman should discuss technical details only when 
necessary, and then in the simplest language possible. 
As a rule, people aren’t interested in complicated 
things. They want to know what insurance will do 
for them and their beneficiaries. It is particularly good 
to illustrate technical points in a “human interest” 
way. For example, extended insurance might be 
explained as follows: “Mr. Dale, this provision, called 
extended insurance, works this way. Suppose you 
had carried this policy five years, found it impossible 
to continue your premium payments, yet felt you still 
needed insurance. This plan, called extended insur¬ 
ance, would, without any further payments by you, 
continue your original $20,000 of insurance for 6 years 
and 132 days. If you died at any time during the period 
of 6 years and 132 days, Mrs. Dale and your little girl 
would receive that $20,000 just the same as if you had 
paid premiums up to the day of your death. Although 
you would have paid only five annual premiums, 
Mrs. Dale and your little daughter would have $20,000 
of protection for 11 years and 132 days. Isn’t that 
really a splendid service?” 


THE END 



















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